Wealthcare Investments

Outcome Bias

In the series of 21 behavioural biases we will discuss the 9^th bias “Outcome Bias”

Human mind being optimistic, expects all the results (outcomes) to be favourable. In other words “as desired”. Gut feel is the major reason for outcome bias and not scientific/rational approach.

Being optimistic is good but it’s best to be realistic. Life coach and trainers have also moved focus from training to be optimistic to being realistic.

Optimistic has heart at play while realistic has mind at play.

Amateur gambler/punter are largely outcome biased, they play till they get it right at their bets and eventually incur heavy losses!! But a great gambler learns thru his games, and becomes master!!

In investing also outcome bias plays significant role. Outcome bias leads to inaction on process also. Some people are so emotional about their process or decision that they become optimistic for life- they never correct their mistakes and stay invested.

I know people who are still invested (be it stocks/ MFs or properties) despite the fact that the returns are negative/sub par. The reasons they cite is - “Kabhi to upar aayega” “itna wait kiya hai aur kar lege” “yeh to bas revive hone hi wala hai”

Returns and risks are not dependent on your perspective, they are dependent on various other factors. Recognize this fact.

Many Indians feel safe in fixed return Investments like FDs, Post Office and LIC. They fail to recognize the general inflation and life style inflation. Unfortunately, side effect of Inflation itself is not well understood by many L.

On the other hand, many feels that a stock corrected by 70-90% are good buy and they are averaging the cost!! Many are still not booking profits after crazy run in few stocks but buying more!

I was also victim of the outcome bias as an investor, made many mistakes in past.

As an Investment manager, I had few calls which went wrong! We churn a portfolio basis the performance, but we do give 2-4 yrs time. Revisit our investment rationale and evaluate the performance. Post which we take decision and move on!!

I humbly admit, I do have share of my own misjudgment. Few MF schemes didn’t perform as expected and we had to move on!

My success rate is more than failures, that’s why we proudly have patron investors with us and their references   .

Best performing funds keep changing every year so we really don’t pay too much attention. We pay attention to Investment process, mandate of scheme and thought process.

So in conclusion, outcome Bias leads to poor decision making and the same repeats if the corrective actions are not taken.

What should you do?

1)      Do not stick to your option. Examine option B also.

2)      Emphasize on process rather than Gut feeling.

3)      Ask yourself if it’s better to consult an expert?

4)      Recall if there was need to take decision? If yes, have you taken decision at right time?

5)      Avoid headline is newspaper and TV. They are usually current and hot which may not be suitable for your long term investing goals.

MF Trivia: Mutual Fund schemes are open ended where you can invest for any period i.e. life -long also. There is no maturity date like FDs, RDs or Insurance policies. So you can redeem money only when you need. Closed ended MF schemes are also available with specific maturity date.

This article is written by Bhavesh D Damania founder of Wealthcare Investments.

You can reach him at 9833778887 and wealthcarein@gmail.com

"Risk comes until you know what, where and why you are Investing"