Results-Oriented Thinking
The cognitive bias of results-oriented thinking is a crucial topic in investing, but it seems to be little discussed in the investment world.
The cognitive bias of results-oriented thinking is a crucial topic in investing, but it seems to be little discussed in the investment world. It's essential to discuss this in 2024, given the performance we've been enjoying for some time now. Through my experience as a professional poker player (for 8 years), I quickly learned about this cognitive bias in relation to expected value (EV)1.
To begin with, what is results-oriented thinking in poker?
Results-oriented thinking in poker refers to the cognitive bias where players judge the quality of their decisions solely on the outcome of a hand, rather than on the soundness of the decision itself. This mentality can be detrimental, as poker involves a significant element of luck, meaning that good decisions can sometimes lead to bad results, and vice versa.
For example, suppose you make a mathematically correct call with the best possible hand given the information available, but an unlikely card appears, causing you to lose the pot. If you then conclude that your decision was wrong simply because you lost, you fall into results-oriented thinking. Conversely, if you make a risky or statistically unfavorable play and win by luck, you may mistakenly believe that your decision was right.
Why is this problematic?
Hinders learning: Judging decisions on the basis of results can reinforce bad habits or discourage good strategies, hindering your long-term improvement.
Emotional bias: This can lead to emotional decisions, such as tilting, where the frustration of a loss affects future play.
Erroneous adjustments: You may modify your strategy based on short-term results rather than long-term expected value (EV), leading to sub-optimal play.
How can you avoid this?
Focus on expected value (EV): Evaluate your decisions in terms of their expected long-term profitability, not immediate results.
Analyze objectively: Review whether your choices were correct given the information and probabilities at the time.
Accept variance: Understand that short-term results can be misleading due to the inherent randomness of poker.
Results-oriented thinking also applies to investing.
Like poker, investing involves a degree of uncertainty and volatility (Mr Market) in the short term. Investors may be tempted to judge the quality of their decisions solely on the basis of immediate results, rather than on the soundness of their analysis or long-term strategy.
Market fluctuations can encourage investors to react impulsively, buying or selling in response to recent gains or losses rather than a rational assessment of fundamentals. If an investment fortuitously generates a profit, investors may mistakenly believe that their strategy is working, encouraging them to take excessive risks in the future.
By focusing solely on results, investors may neglect to identify and correct flaws in their decision-making process.
My weakness
As for me, this kind of cognitive bias has an effect on me, but on undeserved gains. This is what causes me the most psychological problems. It makes me feel more competent in my investment choices and leads me to persevere in unsuccessful investment processes. In reality, I've made a mistake and, as luck would have it, I've made a profit.
Over the past 2-3 years, I've observed this phenomenon in my investments, which have performed well, but which were actually undeserved and simply due to luck. When I say luck, it could actually be a momentum effect on a stock, for no good reason at all. Or a multiple that increases for inappropriate reasons.
How to avoid it?
Recognize that markets (Mr Market) are volatile in the short term, but generally reflect economic fundamentals over the long term. Regularly analyze your decisions to understand what worked and what didn't, regardless of immediate results, in order to improve your investment strategy.
By avoiding results-oriented thinking, you can make more informed decisions, strengthen your discipline and increase your chances of long-term success.
Re-examine all investment decisions after a satisfactory or disappointing performance. Analyze the reasons for the performance (good or bad) to confirm whether the outcome was what we expected, or whether luck was a determining factor.
If luck had a significant impact on the performance (good or bad), then seek to understand why you made that decision and how to avoid making it again.
In conclusion, it's crucial to look at our results with a global perspective and fully understand whether that result was a good mathematical decision, whether it ended with good or bad performance.
If you'd like to find out more about the cognitive biases of results-oriented thinking. I suggest you do a Google search and you'll find several articles on Medium and Substack.
I also recommend reading about expected value (EV) for investing, which is of great importance to me. Edward Thorp, one of the pioneers of expected value (EV)2, is a must.
Max
3Results-Oriented Thinking: A Bias You Need to Break
https://corporatefinanceinstitute.com/resources/data-science/expected-value/
https://medium.com/@bmb21/ev-is-everything-43d22c373519
https://bestinterest.blog/results-oriented-thinking/
Good post.
I think pre-mortems are quite valuable for investing. I have a tendency to warp my memories to fit my current narrative. Laying out what I think will happen and how I will make money makes it easier to be objective.
Dean