Outcome and Hindsight Bias

Process over outcome: a good bet versus a won bet

Hite: a good bet and a won bet are not the same thing. Schwager adds: a good trade can lose money, and a bad trade can make money. Outcome bias judges the decision by the result instead of by the process.

The antidote is a decision journal that strictly separates rule-compliant yes/no from profit/loss. A rule-compliant loss is green, a profit against the rules gets marked red, because it rewards the next rule break.

Only judge an edge from a large sample

Kahneman's law of small numbers: small samples produce extremes more often by chance. After 10 or 20 trades nothing is clear yet, but a lucky streak gets booked as skill and a losing streak triggers strategy-hopping.

• You only judge an edge from well over 100 trades
• You treat shorter streaks as noise
• The casino only has about a 4.5 percent edge at blackjack, yet wins over many hands
• Regression to the mean: after a top week, a more moderate result follows on average

Gambler's fallacy: the market has no memory

After five red candles the reversal is NOT due. Past candles do not change the probability of the next one. Anyone who believes it has to turn now is catching a falling knife. Martingale leads the same trap straight into liquidation.