Have you ever been in a situation where a friend makes a questionable decision based on poor reasoning, only for that decision to prove to be the correct one? Such situations can be mildly infuriating and can lead to more poor decision-making in the future. Your friend will think that they’ve smartly reasoned about the decision and have reaped the fruits of their reward, leading them to poor decision-making in the future.
The opposite can also take place: your friend makes a decision based on a sound, intelligent assessment of the situation, only for that decision to prove to be the wrong one. They might think that they’ve totally failed throughout their entire thought process, leading them to overthink and hesitate in the future.
What do these two situations have in common? In each case, your friend judged the effectiveness of their reasoning process based on the outcome which took place after they made their decision. Intuitively speaking, this may sound reasonable. When you make good decisions, you should consider what factors lead to that desirable outcome so you can repeat them, and when you make bad decisions, you should think back and assess what went wrong so you can avoid them. However, rationally speaking, the decision-making process and the outcome are two distinct events which may or may not have any relation with each other, so care must be taken not to fall susceptible to the belief that they are one in the same.
Consider the following scenario. You and three of your friends want to invest $1,000 each into the stock market. You each decide to put your own $1,000 into a single company and will choose to purchase stock in either Company A or Company B. You select Company A based on your knowledge of the industry and an assessment of its growth over the last few years. Your other friends choose B, B, and A.
One year later, you and the friend who chose Company A see a 20% increase in stock value, but your friends who chose Company B see a 300% increase. Surprised by the results, you tell them your investment strategy and ask everyone else what their strategies were:
- You: I figured Company A was best because I assessed the growth of both companies in previous years and saw more potential in Company A. Company B has been having trouble with generating revenue for the last five years.
- Friend #1: I picked Company B because I read that they were preparing to launch a product that could turn things around for them.
- Friend #2: I picked Company B because I flipped a coin and it landed on tails.
- Friend #3: I picked Company A because I flipped a coin and it landed on heads.
In the first two cases, the decision-making process seems reasonable at a glance, though it would be hard to say without knowing the details. In the last two cases, the decision-making process was totally random, yet one of them still made a more profitable decision than you.
This example showcases the fallacy of assuming that a favorable outcome implies an effective decision-making process. However, it doesn’t necessarily mean that picking randomly, or including elements of randomness and probability in a decision-making process is inherently bad. Many decisions involve a level of risk assessment based on the probability that certain events will take place. If you determine that a a favorable outcome is 70% likely in a given situation, there is still a 30% chance it will not occur; even if your thought process is sound, randomness and unforeseen circumstances can lead to an undesired outcome.
Extending this to its logical extremes, on the one end, I can make a decision and say it will work “because I say so,” and on the other end, I can make that decision based on meticulous research and analysis. I can say that the latter is more likely to lead to success than the former, but I cannot say that success or failure would justify the approach I took in that scenario. That research may or may not have been totally off-base.
When people judge a decision-making process based on the outcome, they fall susceptible to outcome bias. Numerous psychological experiments have demonstrated the effects of outcome bias and reveal that this bias is almost ubiquitous in real-world situations.
This doesn’t mean that negative and positive outcomes can’t be considered at all. If you take the same approach time and time again and continue to see success in your decision-making, you can build an inductive argument which states that your methodology will consistently lead to success. This is part of the basis of scientific research; when an experiment is conducted and a claim is made based on that experiment, other people repeat this experiment to help prove or disprove the claim. In more practical terms, you can use your successes and failures over time to help you improve your decision making progress by analyzing them and making discoveries, but you can’t use a single outcome, or even a small handful of them, as indisputable proof that you are reasoning effectively.
