Outcome bias: judging a decision by its result

[Shadow Trader]

A trade that followed every rule and lost is a good trade. A trade that broke the rules and won is a bad one. Everyone knows this and few act on it.

Outcome bias is the habit of grading a decision by its result instead of by the quality of the reasoning at the time. In a field full of randomness, it's a recipe for learning the wrong lessons. A reckless trade that happens to pay gets repeated. A sound trade that happens to fail gets abandoned.

Poker players have a name for the discipline of separating the two: thinking in bets. Every decision is judged on whether it was the right call given the information and odds, not on how the cards fell.

For a trader, a two-column journal helps: "process grade" and "outcome". A trade graded A on process and a loss on outcome is a good day's work. An F process with a profit is a warning.

Over months, process grades predict results better than any single week's profit.

A sample two-column entry might read: "Process: A. Followed entry rules, size correct, stop untouched. Outcome: -1R." Next to it: "Process: D. Entered early without confirmation, widened stop. Outcome: +1.4R." After a few weeks, summing the outcomes by process grade shows something striking, usually that A trades make money over time and D trades don't, even when a few D trades pay beautifully.

That table is worth more than any motivational quote, because it's built from personal data.

How are decisions graded in the journal: by process, by outcome, or both?