The Hindu Business Line : <I>Outcome bias </I>

Last week, two traders were arguing at a meeting about how people from all walks of life can be successful in equity trading. One of them said that she often found doctors to be bad traders! Her argument was that doctors could be emotionally detached from their patients, as there was nothing personal at stake. In trading, however, emotions kick-in because it is their own money at risk. You may not agree with this argument. Let us instead look at the emotions that are common to doctors and equity traders. It is called the "Outcome Bias". What is it?

Suppose you are a doctor. Your patient is diagnosed with a certain heart condition. You have to choose between a minor surgery and strong medication. You choose the latter after weighing the pros and cons of performing the surgery. Two days later, the patient suffers a heart attack and is in serious condition. How would you react?

Error in judgment

Your decision not to perform the surgery was taken with great deliberation. That the outcome was different is quite another thing. Yet, you may now doubt whether you took the right decision in not performing the surgery. This is an example of "Outcome Bias". It is the error in judging your intelligent decision after the outcome turns out to be different.

Traders face the same problem. Suppose you choose to buy Stock A instead of Stock B. If Stock B moves up faster, you may beat yourself for choosing the wrong one. Three or more such instances and you begin to doubt your judgment. It does not matter if you are a doctor or a trader, you better not doubt yourself after making an intelligent decision.

(The author is based in Surrey, BC, Canada.)

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