Outcome bias describes a tendency to evaluate a decision based on its outcome and not on the process by which the decision was reached. In other words, the quality of a decision is only determined once the outcome is known. Outcome bias occurs when a decision is based on the outcome of previous events without regard for how those events developed.
| Aspect | Explanation |
|---|---|
| Outcome Bias | Outcome bias is a cognitive bias that occurs when the evaluation of a decision or action is based on the outcome or result, rather than the quality of the decision-making process. In other words, it involves judging the wisdom of a choice based on how things turned out, rather than whether the decision was reasonable given the information available at the time. Outcome bias can lead to unfair assessments of decisions and can hinder learning and improvement. |
| Key Concepts | – Judging Decisions by Outcomes: Outcome bias involves the tendency to judge the quality of a decision or action based on whether it led to a positive or negative result. – Hindsight Bias: It is closely related to hindsight bias, where individuals believe that events were predictable after they have occurred. – Risk and Uncertainty: Outcome bias is often influenced by the level of risk and uncertainty associated with a decision. |
| Examples | – Investment Decisions: An investment manager may be praised for a risky investment that happened to yield high returns but criticized for a similarly risky investment that resulted in losses. – Medical Diagnoses: A doctor’s diagnosis may be viewed as competent if a patient recovers, even if the diagnosis was based on uncertain symptoms. |
| Effect on Decision-Making | – Risk Aversion: The fear of negative outcomes due to outcome bias can lead individuals to become risk-averse and avoid making decisions with uncertain outcomes. – Inhibition of Innovation: In organizations, outcome bias can discourage innovation and experimentation, as individuals fear negative repercussions for unsuccessful ventures. |
| Mitigation | – Focus on Process, Not Just Outcomes: To mitigate outcome bias, it’s essential to evaluate decisions based on the quality of the decision-making process, including the information available and the reasoning behind the choice. – Encourage Learning: Creating a culture that encourages learning from both successes and failures can help mitigate the negative effects of outcome bias. |
| Cognitive Biases | Outcome bias is related to several other cognitive biases, including: – Confirmation Bias: The tendency to search for, interpret, and remember information that confirms one’s preconceptions. – Hindsight Bias: The belief that events were predictable after they have already occurred. – Overconfidence Bias: The tendency to overestimate one’s own abilities and the accuracy of one’s beliefs. |
| Applications | – Legal System: Outcome bias can influence legal judgments, where the outcome of a case can disproportionately affect perceptions of the fairness of a legal decision. – Performance Evaluation: In the workplace, employees may be evaluated based on the success or failure of specific projects, rather than on their competence and effort. |
| Implications | – Fairness: Outcome bias can lead to unfair evaluations of decisions and actions, as individuals are often not in control of external factors that influence outcomes. – Innovation and Risk-Taking: Organizations may discourage innovation and risk-taking if they excessively punish failures without considering the decision-making process. |
| Learning and Improvement | To promote learning and improvement while mitigating outcome bias: – Encourage a culture of transparency, where individuals feel safe admitting mistakes. – Emphasize the importance of reviewing and learning from both successful and unsuccessful outcomes. – Focus on the decision-making process and the factors that were within an individual’s control. |
| Conclusion | Outcome bias is a cognitive bias that can significantly impact decision-making, fairness, and learning. By recognizing its presence and taking steps to mitigate its effects, individuals and organizations can make more informed and fairer evaluations of decisions, fostering a culture of continuous improvement and innovation. |
Understanding outcome bias
Outcome bias is common in humans because we tend to be self-evaluative.
We tend to look back at what we’ve done and use any lessons learned to measure our future performance.
This can be a useful trait in some circumstances, but it can also be a problem when something bad happens.
When a decision results in a poor outcome, we tend to place more importance on the outcome of a decision.
We may be overly self-critical or indeed critical of others when compared to instances where a decision resulted in a positive outcome.
It does not matter if the decision-making process was well considered or if the likelihood of success was down to chance.
This is not to say that outcome bias does not occur when there is a favorable outcome.
Consider an individual who decides to invest in real estate after learning that a friend made a significant capital gain.
Outcome bias causes the individual to become preoccupied with how much money was made and in the process, ignore the mechanisms behind their friend’s success.
Perhaps a government stimulus package for new home builders was a contributing factor, or maybe a combination of low-interest rates and a knack for identifying undervalued property was the cause.
The outcome bias in business
In business, an overemphasis on performance is creating an outcome-centric culture in which someone must lose in order for someone else to win.
As a result, outcome bias is present in many performance-related situations including:
Recruitment
A hiring manager is only considered successful if the employee they recruit performs well.
With less emphasis on the reasoned and fair recruitment process, employees are led to believe that they are either good at their job or bad at their job.
When evaluations are based on a binary result and not on the quality of an employee’s decision-making, good luck is rewarded over competence or expertise.
Product development
Products are judged according to how well they were received in the market, rather than the product development-related processes and systems that made the product a reality in the first place.
Leadership
Once an outcome is known, the outcome bias also hinders our ability to evaluate whether a leadership decision was good or bad.
Fearful of negative repercussions, outcome bias can make some leaders risk-averse.
Conversely, irresponsible leaders who make reckless decisions are rewarded if their decision results in a positive outcome.
In this case, the subordinates who doubted the leader’s ability may be subject to harsh treatment from others.
Avoiding outcome bias
Critical thinking is one way of avoiding outcome bias. Instead of focusing on outcomes, we need to focus on the process as a whole.
Like many cognitive biases, however, outcome bias can be difficult to address on our own.
We may sabotage ourselves by quitting too early or ignoring certain information we don’t like.
In this situation, it can be helpful to collaborate with a colleague or superior to understand the underlying causes of the bias.
In any case, consider these questions:
- What led us to make the decision?
- Was there a better process we could have followed in making the decision?
- Could we have liaised with other people?
- What information did we have at our disposal? What information did we not have?
- Could we have obtained more data?
- Was it necessary to decide at the point the decision was made?
- Were there previously unknown external factors that may have skewed the decision?
Outcome bias and hindsight bias
As we saw, outcome bias can be pretty tricky.
Indeed, in the current business world, where we all claim to be looking at results, it can be very easy to fall into the trap of overestimating the outcome toward understanding whether the process makes sense in the first place.
The combination of the outcome bias with other fallacies might lead to a complete misjudgment of business events.
Indeed, when judging for outcomes, it’s critical not to fall into the hindsight bias.
This can lead to underestimating, for instance, the outcome of business events by overestimating our own ability to predict the future based on the past.
In short, take the case of a classic example in business, where a product like the BlackBerry phone was overtaken by the iPhone.
While in hindsight, it’s very easy to perform all analyses and conclude that it was clear that the iPhone was on a path to disrupt the BlackBerry.
That is a huge fallacy as if you were living in the moment, the real world was way more ambiguous, opaque and noisy than we like to admit.
In this specific case, we fall into the trap of overestimating our ability to analyze the past and underestimate the ability of BlackBerry’s management team (of the time) to respond to the threat of the iPhone!
We might want to call it also “the analyst bias” or the belief that you can look at past events with today’s understanding of them.
That, in turn, might lead to overestimating one’s ability to predict the future while underestimating other people’s ability to do the same.
Thus, it’s critical to balance out this bias by looking at the past and understanding that, while things could have been done differently, it’s also hard to predict future events based on what’s happening now.
As the real world is extremely noisy, opaque, and non-linear.
In the case of the iPhone, for instance, it might be that BlackBerry’s management did understand the threat but could not move fast enough, as the iPhone took off so quickly that, like with a snowball, BlackBerry found it swept up, in a very short time range.
Outcome bias and attribution error
The other side of the coin is represented by the so-called fundamental attribution error.
Whereas we overstate the behavior of an individual and his characteristics while understating the context and environment in which this individual acted.
A classic example is in all the self-improvement literature, which looks at individual success as if it was a predictable path, yet as usual, in hindsight.
For instance, books that focus on the features of successful individuals are often skewed toward over-emphasizing the personal habits of those people, as those have a direct relationship with the outcome.
Take the case of the classic self-improvement book which looks at the habits of successful people.
Yet, this doesn’t tell you that many unsuccessful people might also carry the same habits.
In other words, these habits are selected in hindsight based on the outcome rather than considering that those might be random traits shared by many individuals.
And yet, most of those individuals who carry those habits don’t turn successful.
Take the case of statements like “successful people wake up early.”
As if all the people that wake up very early are successful.
This leads to many more people following false patterns, believing that those are what creates success rather than focusing on building their own way of doing things.
Outcome bias and survivorship bias
Another huge risk when falling into the outcome bias is to look at successful people and try to make a pattern of it.
In those cases, it’s easy to fall into the survivorship bias.
Going back to the self-improvement literature, which studies successful people, often their habits and features are overstated to make the case and sell more of these books.
But in reality, this literature only studies what’s visible now without considering what’s not visible anymore.
For instance, take the case of the book, which shows you what great companies do by looking at the list of dominant/leading companies in the marketplace.
It’s easy to extrapolate successful processes from these companies as if you can also build a successful company by copying them.
Yet, this falls into the outcome bias, where many other companies which followed the same procedures didn’t make it at all!
Case Studies
- Sports:
- Decision: A soccer coach decides to substitute a key player during a crucial game.
- Outcome: The substitute player scores the winning goal.
- Bias: Everyone praises the coach’s decision as brilliant, even if the substitution was due to the key player being injured and not a strategic move.
- Investments:
- Decision: An investor decides to put a significant portion of their portfolio into a relatively unknown start-up.
- Outcome: The start-up becomes the next big tech giant.
- Bias: Everyone considers the investor a genius, ignoring the countless other similar bets that didn’t pan out.
- Medical:
- Decision: A doctor decides to try an experimental treatment on a critically ill patient.
- Outcome: The patient recovers fully.
- Bias: The doctor is hailed as innovative and brilliant, even though the decision had a high risk of not succeeding.
- Entertainment:
- Decision: A movie director decides to cast an unknown actor in the lead role of a big-budget film.
- Outcome: The movie becomes a blockbuster, and the actor becomes an overnight sensation.
- Bias: The director’s decision is labeled as visionary, even though many factors could have contributed to the movie’s success.
- Business Strategy:
- Research & Development:
- Decision: A research team decides to abandon a project they’ve been working on for years to pursue a new idea.
- Outcome: The new idea leads to a revolutionary discovery.
- Bias: The team’s decision is seen as a stroke of genius, overlooking the resources and time spent on the abandoned project.
- Marketing:
- Decision: A marketing manager decides to invest heavily in an unconventional advertising campaign.
- Outcome: The campaign goes viral, leading to record sales.
- Bias: The manager’s risky decision is celebrated, even though many similar campaigns fail to make an impact.
- Politics:
- Decision: A leader decides to take a controversial stand on a divisive issue.
- Outcome: Public opinion shifts in their favor, and they win the next election.
- Bias: The leader’s decision is seen as bold and visionary, ignoring the myriad of other factors that influence elections.
- Education:
- Decision: A teacher decides to implement a new teaching method in the classroom.
- Outcome: Students’ grades improve significantly.
- Bias: The teacher’s method is hailed as revolutionary, even though other external factors (like smaller class sizes or additional resources) might have contributed.
- Real Estate:
- Decision: A property developer decides to invest in a dilapidated area of the city.
- Outcome: The area becomes a trendy hotspot, and property values soar.
- Bias: The developer’s decision is seen as a masterful understanding of market trends, even if other macro factors (like improved public transport or city-wide development initiatives) played a part.
Key Takeaways
- Outcome bias occurs when a decision is based on the outcome of previous events without regard for how those events developed.
- Outcome bias in business tends to occur in the recruitment process, product development, and leadership. Most conspire to create an outcome-centric culture in organizations where one person has to lose for another to win.
- Outcome bias can be avoided with critical thinking and a commitment to focusing on processes. Discussing the bias with a trusted colleague or supervisor can be a good way to uncover its underlying causes.
Key Highlights
- Outcome Bias: Outcome bias is the tendency to evaluate a decision based on its outcome rather than considering the process by which the decision was made.
- Self-Evaluative Nature: Humans are self-evaluative beings, often using the outcome of decisions to measure future performance.
- Positive and Negative Outcomes: Outcome bias can occur when a decision results in either a positive or negative outcome.
- Business Application: Outcome bias can be present in various business situations, such as recruitment, product development, and leadership decisions.
- Avoiding Outcome Bias: To avoid outcome bias, critical thinking is essential, focusing on the decision-making process rather than just the outcome.
- Hindsight Bias: Be cautious not to fall into hindsight bias, perceiving past events as more predictable than they actually were.
- Attribution Error: Avoid fundamental attribution error by considering environmental and situational factors, not just personal characteristics, when judging the behavior of others.
- Survivorship Bias: Be aware of survivorship bias, which focuses on successful individuals or companies without considering the failures that may have occurred in the same context.
Connected Thinking Frameworks
Convergent vs. Divergent Thinking
Law of Unintended Consequences
Read Next: Biases, Bounded Rationality, Mandela Effect, Dunning-Kruger Effect, Lindy Effect, Crowding Out Effect, Bandwagon Effect.
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