Investing, by nature, makes it hard to separate good decisions from good luck. Uncertainty, randomness, and noise muddy results. Anything can happen in markets in the short run.
In addition, human nature drives us to be outcome-biased. We tend to judge decisions based on the outcome instead of on the quality of the decision made.
We see this often in sports. Fans praise coaches and players when the team wins. They criticize them if they lose.
- Wins = Good Decision
- Losses = Bad Decision
That’s the outcome bias. There’s no accounting for the riskiness or soundness of the strategy or decisions during the game. There’s no nuance.
Yet, sports are dominated by uncertainty. Any team has a chance to win any one game. This is how great teams lose to underdogs. Everything seems to fall in line for the lesser team and they come out on top. Continue Reading…