Outcome bias is the tendency to evaluate the quality of a decision based on the known outcome of that decision. If result is good, we think the decision was good; if result is bad, we think that the decision was bad.
This conclusion is perhaps a simple one, but very often it is meaningless. As Nassim Taleb nicely put it, any information acquired after a decision is made should not be used to judge the quality of that decision!
Outcome is one such piece of information that is only acquired after the decision is made - and yet we seem to have a very hard time disconnecting decisions from their outcomes; we have a tendency to judge them together.
Here is one example of how outcome bias manifests. You play Texas Holdem poker with a bunch of friends. There are five players. You look at your cards, you got ace and queen. Not bad! You raise preflop and get one caller. On the flop you hit two pair. You bet a lot, the other guy raises you, you go all-in, which happens to be a big re-raise. The other guy thinks for a moment, and eventually calls. He shows an ace and a five, which only makes a top pair. You are way ahead... In fact, you have more than 98% chance to win if the cards are properly shuffled. You get relaxed and wait for the other two cards. Unfortunately, two more fives pop up, and he hits a full house. You are very upset - the guy made a terrible call and still wins a huge pot.
But it gets worse. The guy nods his head with a smile and says: "I made a good call." You get furious, and you want to rip his head off. "What an idiot! He had such a tiny chance to win, and he thinks he made the right decision just because the outcome was good. Moron!"
Well, he may be a moron, and he certainly is a victim of outcome bias. In poker it is actually good for you if other players are clueless about outcome bias, but in other areas of life, like business or government, I would rather have people be more resistant to it.
Outcome bias makes it difficult for us to learn how to make better decisions, especially when risk is involved. And how often do we make decisions which involve no risk anyway?
How often do you read that certain investor must have a great market strategy "because" he is having great financial results? How often do you see someone claiming that they possess great skills at their job and "kick ass" with the "proof" being market success of a product they have just launched?
The problem with the outcome bias is that usually many hidden factors play a role in determining result of an action. Outcomes are clearly visible to us, so we use them as a proxy to evaluate a decision. But we do not really know why things go certain way. We just believe things are easy to explain.
Listen carefully to explanations of events and decisions people give to you, and you will learn a lot about how they think. I am concerned when people I care about are unaware of this bias. I accept that I do not know the quality of my decisions. I do not assume that decisions I am taking are good just because results are good, and vice versa. Most life situations are far more complex.
Try Wikipedia for more information on the outcome bias and other cognitive biases. "Fooled by Randomness" and "The Black Swan" provide a lot of anecdotes on related topics, and there are plenty of scientific articles about the phenomenon.
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