outcome-bias

What Is The Outcome Bias? The Outcome Bias In A Nutshell

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.

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?

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.

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Connected Business Concepts

First-Principles Thinking

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First-principles thinking – sometimes called reasoning from first principles – is used to reverse-engineer complex problems and encourage creativity. It involves breaking down problems into basic elements and reassembling them from the ground up. Elon Musk is among the strongest proponents of this way of thinking.

Ladder Of Inference

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The ladder of inference is a conscious or subconscious thinking process where an individual moves from a fact to a decision or action. The ladder of inference was created by academic Chris Argyris to illustrate how people form and then use mental models to make decisions.

Six Thinking Hats Model

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The Six Thinking Hats model was created by psychologist Edward de Bono in 1986, who noted that personality type was a key driver of how people approached problem-solving. For example, optimists view situations differently from pessimists. Analytical individuals may generate ideas that a more emotional person would not, and vice versa.

Second-Order Thinking

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Second-order thinking is a means of assessing the implications of our decisions by considering future consequences. Second-order thinking is a mental model that considers all future possibilities. It encourages individuals to think outside of the box so that they can prepare for every and eventuality. It also discourages the tendency for individuals to default to the most obvious choice.

Lateral Thinking

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Lateral thinking is a business strategy that involves approaching a problem from a different direction. The strategy attempts to remove traditionally formulaic and routine approaches to problem-solving by advocating creative thinking, therefore finding unconventional ways to solve a known problem. This sort of non-linear approach to problem-solving, can at times, create a big impact.

Moonshot Thinking

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Moonshot thinking is an approach to innovation, and it can be applied to business or any other discipline where you target at least 10X goals. That shifts the mindset, and it empowers a team of people to look for unconventional solutions, thus starting from first principles, by leveraging on fast-paced experimentation.

Biases

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The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman in 1972. Biases are seen as systematic errors and flaws that make humans deviate from the standards of rationality, thus making us inept at making good decisions under uncertainty.

Bounded Rationality

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Bounded rationality is a concept attributed to Herbert Simon, an economist and political scientist interested in decision-making and how we make decisions in the real world. In fact, he believed that rather than optimizing (which was the mainstream view in the past decades) humans follow what he called satisficing.

Dunning-Kruger Effect

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The Dunning-Kruger effect describes a cognitive bias where people with low ability in a task overestimate their ability to perform that task well. Consumers or businesses that do not possess the requisite knowledge make bad decisions. What’s more, knowledge gaps prevent the person or business from seeing their mistakes.

Occam’s Razor

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Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.

Mandela Effect

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The Mandela effect is a phenomenon where a large group of people remembers an event differently from how it occurred. The Mandela effect was first described in relation to Fiona Broome, who believed that former South African President Nelson Mandela died in prison during the 1980s. While Mandela was released from prison in 1990 and died 23 years later, Broome remembered news coverage of his death in prison and even a speech from his widow. Of course, neither event occurred in reality. But Broome was later to discover that she was not the only one with the same recollection of events.

Crowding-Out Effect

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The crowding-out effect occurs when public sector spending reduces spending in the private sector.

Bandwagon Effect

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The bandwagon effect tells us that the more a belief or idea has been adopted by more people within a group, the more the individual adoption of that idea might increase within the same group. This is the psychological effect that leads to herd mentality. What is marketing can be associated with social proof.

Read Next: BiasesBounded RationalityMandela EffectDunning-Kruger EffectLindy EffectCrowding Out EffectBandwagon Effect.

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