Core terms
Outcome bias
Judging the quality of a decision by how it turned out rather than by what was knowable and controllable when it was made.
Baron and Hershey (1988) found that people rate the same decision as better when they are told it turned out well. In trading, outcome bias shows up in two ways: keeping a careless habit because it produced a win, and abandoning a sound plan after a normal losing streak.
A review that separates decision from outcome asks: were the plan's conditions met, was the risk planned, was the size correct, were costs considered? Then, separately: what happened? A trade that followed the plan and lost is a different review item from a trade that broke the plan and won.
What traders should verify
Write the decision-quality note before looking at the P&L of the trade, or in a separate column. Review plan deviations even when they made money.
Do not conflate
Outcomes still matter in aggregate: over a large enough sample, results are how a plan is evaluated. Outcome bias is about over-weighting single results, not ignoring results.
Primary source
Primary sourceBaron and Hershey, 1988