Outcome Bias: Mistaking Good Results for Good Decisions

“Don’t judge a decision by its outcome; judge it by the process that led there.”

The Trojan Horse Lesson

In 1184 BCE, after a decade of siege, the Greeks rolled away from the walls of Troy, leaving behind a giant wooden horse. The Trojans, believing the war was finally won, pulled it inside as a trophy of victory. That night, Greek soldiers hidden within the horse opened the gates, and Troy was destroyed.

For centuries, the Trojan Horse has been celebrated as a stroke of genius-  a brilliant military tactic. But was it really? Or was it a reckless gamble that just happened to work because the Trojans fell for it? If the horse had been set on fire, history would remember it as a foolish mistake.

This is the trap of outcome bias: we judge the quality of decisions not by their logic, but by whether they succeeded. And in doing so, we risk learning the wrong lessons.

The Allure of Outcomes

In investing, results are intoxicating. A start-up lands a blockbuster IPO, a stock triples overnight, or a fund posts dazzling IRR, an unusually high or impressive return rate. It’s tempting to declare the decisions that led there as brilliant. But here lies the danger: not every good result comes from a good decision. Sometimes it’s just timing. Sometimes it’s just luck.

Outcome bias blinds us to this truth, making us equate success with wisdom and failure with folly. It encourages investors to focus on what happened, rather than on whether the process that led there could stand up to repeated trials. That is where the real danger lies: bad decisions that happen to succeed get repeated, while sound judgment that faces a temporary loss gets abandoned.

How Outcome Bias Warps Investor Judgment

• Celebrating Winners Without Context A company goes public at a high valuation. But was it strategy or a frothy market that floated everyone?

  
  

• Forgiving Bad Processes Because They Paid Off A rushed diligence still produced a unicorn. Suddenly, shortcuts get rebranded as “savvy intuition.”

  
  

• Punishing Good Processes Because They Lost Money A sound thesis is undone by external shocks. Instead of reinforcing discipline, the market punishes caution.

  
  

The result? Investors learn the wrong lessons, which is repeating sloppy behaviour when it wins and abandoning sound judgment when it loses.

Famous Case Studies

• Dot-Com Boom: In the late 1990s, VCs who backed companies with weak models looked like geniuses when IPOs soared. But when the bubble burst, the difference between luck and process became painfully clear.

  
  

• Subprime Crisis (2008): Traders earned record bonuses from mortgage-backed securities. The results sparkled, but the underlying decisions were reckless.

  
  

• Crypto Manias: Early investors who rode Bitcoin or meme tokens to the moon looked visionary. In hindsight, many of those bets were speculation dressed up as foresight.

Why Outcome Bias is So Dangerous

Outcome bias is dangerous because it reshapes investor behaviour in subtle but damaging ways. When bad decisions are rewarded by luck, investors start to believe those shortcuts are skill, reinforcing poor habits that can collapse in the long run. At the same time, when disciplined, process-driven investments lose money due to uncontrollable factors, managers are penalized for doing the right thing.

Over time, this distortion corrodes learning. Instead of building a library of sound practices, investors build myths around lucky wins and false lessons from unlucky losses. It also fuels hero worship-  where founders or fund managers are celebrated not for their discipline, but for being on the right side of chance. In short, outcome bias doesn’t just cloud judgment; it corrupts the entire cycle of decision-making.

Escaping the Trap

• Ask Process Questions: What data was used? Were risks identified? Was the thesis falsifiable?

• Separate Process from Results: Review decisions based on reasoning, not returns.

• Analyse “Bad Beats”: Study failures that follow good processes - they’re proof of discipline, not incompetence.

• Normalize Process Wins: Celebrate teams that stick to rigorous frameworks even when results don’t go their way.

  
  

The Bias Stack Connection

Outcome bias rarely operates alone. It interlocks with the others:

• Survivorship Bias makes us idolize winners.

• Confirmation Bias makes us filter evidence to justify them.

• Sunk Cost Fallacy makes us hold too long.

• Outcome Bias crowns the illusion - convincing us that results equal brilliance.

  
  

Together, these biases don’t just distort individual investments. They compound across portfolios and markets, making the system reward luck over discipline.

Closing: Courage Beyond Outcomes

Good decisions sometimes lead to bad outcomes. Bad decisions sometimes lead to good ones. The investor’s true skill lies in telling the difference.

Outcome bias tempts us to conflate success with wisdom, but real investing is about process, not luck. The most enduring portfolios are built by managers who can defend the quality of their reasoning, not just the shine of their returns.

Because in the end, judging decisions solely by outcomes is like grading a student on one lucky guess. It says nothing about whether they’ve actually learned.