Evaluating decisions is helpful for making better decisions in the future. But evaluating decisions is not easy, because the outcome is often known. When the decision and the judgement of the decision use different information, mistakes are bound to be made. Just as I experienced when I won in the lottery.
– Nudges for a Healthy Lifestyle –
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Last month I walked past a small shop in my hometown that sells lottery tickets. The announcement on a poster of the €14 million jackpot spurred my greed. I decided to walk in and buy the €20 lottery ticket. Although I didn’t hit the jackpot, my lottery ticket did win me €250. Not a bad return on a €20 investment made the week before. So without hesitation, I congratulated myself on making the right decision to buy the lottery ticket.
But did I really make the right decision? Or was I blindsided by the profit it produced? The expected value of any lottery ticket is by definition lower than the price you pay for it. The lottery has costs for hiring staff, running marketing campaigns and making a profit themselves. Therefore the lottery ticket is always worth less than what you pay for it. In gambling, the house always wins in the end. While I knew this all along, the focus on the positive outcome made me err when evaluating my decision to buy the lottery ticket. This phenomenon is called outcome bias.
What is outcome bias?
Outcome bias is an error made in evaluating a decision when the outcome of the decision is known. People often judge a decision by its outcome instead of the quality of the process with the information that was available at the time. Especially when the outcome is extremely positive or extremely negative, the result is given too much weight. The outcome of a decision will often be determined by chance, with some decisions working out and others not. Decision makers are frequently held responsible for outcomes beyond their control. Which may result in decision makers either given too much credit or too much blame.
In the paper Outcome Bias in Decision Evaluation by Baron and Hershey, participants rated decision makers and their thinking as more competent when the outcome was favorable than when it was not. Tasks included evaluating a decision of a surgeon to operate a patient or not. The operation had a known probability of success. Participants were presented with either a positive outcome where the patient had survived or a negative outcome where the patient had died. When asked to rate the quality of the surgeon’s decision, those presented with negative outcomes rated the decision as worse than those who were given positive outcomes. With a known probability of success for the operation, the quality of the surgeon’s decisions should have been rated equally.
When I evaluated my own decision to buy the €20 lottery ticket, I already knew the outcome of a €250 win. Because I focussed to much on the positive outcome, I made the error of complimenting myself for making the right decision. When I made the decision to purchase the lottery ticket, I didn’t have the information about whether or not the lottery ticket would make a profit. But I knew that the expected value of the lottery ticket was less than what I had to pay for it. So although I made a profit, my decision to participate in the lottery was a bad one. The outcome was determined by chance, not by a well informed decision on my side.
Bad boys of outcome bias
When people are known to make mistakes, there will always be others who try to take advantage of it. This is how frauds make use of the outcome bias.
A fraud sends 10.000 people an e-mail claiming that he knows what the stock market will do in the upcoming week. Half of the people receive an e-mail with the forecast that the stock market will go up and half of the people that it will go down. That means that whatever happens, 50% of 10.000 people will receive correct information. The following week the fraud continues with the 5.000 people that received the correct prediction. Once again half of them receives an e-mail with a forecast that the stock market will go up and half that it will go down. At the end of the week 2.500 people have received two correct forecasts. After six weeks of e-mails, it will result in 156 people that have received six correct predictions in a row concerning the stock market. That is impressive when it comes to results. Maybe the ‘special tool for market analysis’ that the fraud claims to use is really that special. And at that moment when 156 people are very impressed with the outcomes, the fraud offers them the seventh prediction for a fee of €100. Not everyone in the group of 156 people will fall for it, but some will. And that is how the fraud makes money using our tendency to focus too much on results. Now imagine that the fraud didn’t start with 10.000 people, but with 1.000.000 people to e-mail in the first week. That is easy money for sending a weekly e-mail.
How to prevent outcome bias?
Fortunately there are ways to put more emphasis on the quality of the process than on the results alone when evaluating a decision. Here are some questions that can be helpful.
- What information did you have?
- What information didn’t you have?
- What did the decision making process look like?
- What were the odds of a positive outcome?
- Did you have to make a decision at that time or could you have waited for better information to make your decision?
- Why did you take the decision that you took?
These questions can help prevent poor decision making down the road. For example, when I asked myself these questions, I was able to evaluate my decision to play the lottery much better. This prevented me from gambling much bigger next time with possibly negative consequences for my financial wellbeing. Same goes for sports activities. If I decide to run a marathon unprepared and manage not to injure myself during the run, it doesn’t mean I made the right decision. Even if the outcome was positive with a good result and no injuries. So don’t get blindsided by either positive or negative outcomes and focus on the decision making process. It will pay off with better decision making in the future.Why You Shouldn't Judge Decisions by Their Outcomes Click To Tweet
Sander Palm (1980) is author of Golden Behaviors and behavioral economist. He uses insights from the behavioral sciences to explain why people often act against their own interests. As a behavioral expert, he explores how you can nudge your behavior for a healthy lifestyle. He has a Master of Science in Marketing (VU University Amsterdam).
When you have been inspired to start and maintain your Golden Behaviors, reach out to me.
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