Outcome Bias

Outcome bias is the tendency to judge the quality of a decision based solely on its final result rather than the quality of the process that led to that decision. In financial derivatives, a trader might take an excessively leveraged position that violates all risk management rules, yet profit because the market moved in their favor.

If the trader concludes that the trade was a good decision because it made money, they have fallen victim to outcome bias. This is dangerous because it encourages the repetition of reckless behavior that will eventually lead to catastrophic losses.

Professional trading requires focusing on the decision-making framework, the probability of success, and the risk-reward ratio, regardless of whether a specific individual trade results in a gain or a loss.