What is 'Outcome Bias'

Outcome bias arises when a decision is based on the outcome of previous events, without regard to how the past events developed. Outcome bias does not involve analysis of the factors that lead to a previous event, and instead de-emphasizes the events preceding the outcomes and overemphasizes the outcome. Unlike hindsight bias, outcome bias does not involve the distortion of past events.

BREAKING DOWN 'Outcome Bias'

Outcome bias can be more dangerous than hindsight bias in that it only evaluates actual outcomes. For example, an investor decides to invest in real estate after learning a colleague made a big return on an investment in real estate when interest rates were at a different level. Rather than look at other factors that could have resulted in the colleague’s success, such as the health of the overall economy or performance of real estate, the investor is focusing on the money made by the colleague.

Gamblers also fall prey to outcome bias. While statistically, casinos come out ahead far more regularly, many gamblers use anecdotal "evidence" from friends and acquaintances to justify their continued playing. This outcome bias: that continuing to play could result in winning a large amount of money prevents the gambler from leaving the casino.

In business settings, an overemphasis on "performance" is increasingly creating an outcome-centric culture which often exacerbates people’s fears by creating up a zero-sum game in which people are either succeeding or losing and “winners” quickly get weeded out from “losers.” As an example, few would argue with the impressive growth of social media companies. During this growth, only a handful of individuals cautioned against the methods by which growth was generated. Upon learning personal and private user data was a significant driver of growth, the outcome bias of social media is on full display.

RELATED TERMS
  1. Dedicated Short Bias

    Dedicated short bias is a strategy where a hedge fund maintains ...
  2. Behaviorist

    A behaviorist accepts the often irrational nature of human decision ...
  3. Applied Economics

    Applied economics refers to the use of economy-framed theories, ...
  4. Mechanism Design Theory

    Mechanism design theory is an economic theory that seeks to study ...
  5. Global Macro Hedge Fund

    A global macro hedge fund is an actively managed fund that attempts ...
  6. Unsolicited Application

    An unsolicited application is a request for life insurance coverage ...
Related Articles
  1. Financial Advisor

    8 Common Biases That Impact Investment Decisions

    Behavioral biases hit us all as investors and can vary depending upon our investor personality type.
  2. Investing

    5 Mental Mistakes That Affect Stock Analysts

    They know more about stocks than the average person, but analysts are still affected by biases. Find out what they are.
  3. Investing

    9 Cognitive Biases That Affect Your Business

    Human beings often act irrationally when it comes to business decisions. Behavioral finance explains the difference between what we should do and what we do.
  4. Investing

    Mutual Fund Returns: Not Always What They Appear

    Survivorship bias erases substandard performers, distorting overall mutual fund returns.
  5. Financial Advisor

    Behavioral Finance: How Bias Can Hurt Investing

    Here are three cognitive biases from behavioral finance that investors would do well to be aware of to avoid making poor investment decisions.
  6. Personal Finance

    How to Think About College as an Investment

    If you view college as an investment, the costs and risks must be weighed against potential returns.
  7. Investing

    Is Your Wealth Advisor an Investment Vulcan?

    Research shows that investments managed by financial advisors perform better. Why?
  8. Investing

    4 Behavioral Biases And How To Avoid Them

    Here are four common common behavioral biases for traders and how to minimize their effects on your portoflio.
  9. Investing

    Behavioral Finance and the 4 Stages of Bull and Bear Markets

    Step into the psychological aspect of investing. Just as investor behavior can be irrational during bull markets, bear market cycles may also exemplify unique cognitive biases.
RELATED FAQS
  1. What is the difference between speculation and gambling?

    Learn about speculation and gambling, examples of speculation and gambling, and the main difference between a speculator ... Read Answer >>
  2. What percentage of the population do you need in a representative sample?

    Learn about representative samples and how they are used in conjunction with other strategies to create useful data with ... Read Answer >>
  3. How did moral hazard contribute to the 2008 financial crisis?

    Learn about moral hazard, how it can affect outcomes and how it contributed to the conditions that led to the 2008 financial ... Read Answer >>
  4. What are some of the limitations and drawbacks of economics as a field?

    Find out why the field of economics is full of controversy. Policy decisions, political campaigns and personal finances are ... Read Answer >>
Trading Center