DEFINITION of 'Texas Sharpshooter Fallacy'
An analysis of outcomes out of context that can give the illusion of causation rather than attributing the outcomes to chance. The Texas sharpshooter fallacy fails to take randomness into account when determining cause and effect, instead emphasizing how outcomes are similar rather than how they are different.
The Texas sharpshooter fallacy takes its name from a gunman who shoots at a side of a barn, only later to draw targets around a cluster of points that were hit. The gunman didn’t aim for the target specifically (instead aiming for the barn), but outsiders might believe that he meant to hit the target.
BREAKING DOWN 'Texas Sharpshooter Fallacy'
The fallacy outlines how people can ignore randomness when determining whether results are meaningful. Investors may fall prey to the Texas sharpshooter fallacy when evaluating portfolio managers. By focusing on trades and strategies that a manager got right, the investor may inadvertently disregard what the manager didn’t do well. For example, the clients of a portfolio manager may have seen positive returns during an economic crisis, which may make the manager seem like someone who predicted the downturn.
Another example of the fallacy is an entrepreneur who creates many failed businesses, but a single successful one. The businessman touts his entrepreneurial capabilities while de-emphasizing that he had many failed attempts. This can give the false impression that the businessman was always successful, while ignoring the many times he was not.