The illusion of results,...

...or "Good results are not always the result of good decisions."

The illusion of results is very common, if not particularly common, on the financial markets. Most investors mistakenly interpret high returns as the result of a wise investment decision. However, this ignores the fact that returns, at least in the short term, can also be subject to a certain degree of chance.

An example:

A man comes out of the betting shop full of joy. He has bet on Austria winning the World Cup final against Germany 3:1. Jackpot! (who knows 😉)

He says: It was the best decision of my life to bet on Austria to win the World Cup!

Well, by great luck, by very, very good luck (good for Germany that they are hosting the European Championship), he was able to realize this result or the win.

The underlying decision was nevertheless wrong, because what is the probability that this result or event will actually occur?

It is not for nothing that betting shops win by and large.

The mistake of the "winner" is that he uses the profit made to assess the decision to bet. However, this is not correct, as he:

- A: did not know that Austria would even make it to the final

- B: Austria scores 3 goals against Germany

- C: Germany would score one goal at all against Austria 😉 (Sorry had to be)

Success doesn't always make you right!

It is also possible for someone to buy a share that is not considered recommendable from a reasonable perspective and still be successful.

Critics of such decisions are often dismissed with the superficial argument "Success proves that I was right". However, this too is obviously a significant trap in thinking.

The key mistake in the illusion of results is to confuse good results with a good decision!

The outcome illusion, also known as outcome bias, refers to the tendency to judge the quality of a decision based on the outcome rather than the process that led to the decision making. In other words, the evaluation of an action or decision is heavily influenced by the actual results, rather than objectively analyzing the process that led to those results.

This can lead to incorrect conclusions, as the success or failure of an action is not always solely due to the quality of the decision.

quality of the decision alone.

There are many uncertainties and uncontrollable factors that can influence the outcome.

One example could be: If someone makes a risky investment based on insider information and makes a substantial profit as a result, the illusion of outcome could lead the person to be considered wise and informed, even though the decision was based on unethical behavior.

This is also an issue that has come up again and again in recent months, if not in recent years, especially in collective bargaining:

"Are the managers' bonus payments justified?"

If we take managers in the energy or oil companies as an example.

These are partly dependent on the development of the share price, so "our" attitude to high salaries can also be seen as a "misjudgement".

Positive business developments in these sectors are often not due to good management decisions, but to price increases caused by international crises (war in Ukraine, conflict in the Middle East), the reduction in production volumes by OPEC countries, etc.

Conversely, it is also a consequence of the earnings illusion if the same management has to contend with sharp price declines in one year, e.g. corona crisis, for which it is not responsible and therefore does not receive a bonus and share prices collapse.

A fictitious example from Prof. Frühwirth (WU Vienna):

Suppose a private investor ten years ago (2012) was faced with the decision to invest his savings either in an MSCI Word ETF, or in a very focused way in an individual share. The investor was ultimately so convinced by his analysis that he invested all his money in Tesla shares, and would also have had the opportunity to invest in Wirecard!!!!

In retrospect, this investment led to a gigantic price increase (10,000% 10/2022).

The return of the ETF could not keep up with this price increase (180% 10/2022).

Based on this return, the investor is certain that he has made a good decision.

But this assertion is also subject to the illusion of results!

However, he should have invested in the ETF, as the risk would have been widely spread. What would have happened if Tesla had crashed like Wirecard? Would anyone have seen something like this coming back then that Wirecard would, in short, "screw up"?

Assistance:

To avoid the illusion of results, it is important to evaluate decisions based on the knowledge and information available at the time of the decision, rather than making retrospective judgments based on outcomes that occurred later. It is important to recognize that good decisions can sometimes lead to bad outcomes and vice versa.

Realize that in daily life as well as in investing, you may always be under the illusion of results.

Try to judge your decisions based on the quality of the decision making rather than the outcome. Most decisions are made under risk and uncertainty. Quasi in you are always smarter with hindsight.

Note: High returns are not necessarily the result of a good investment decision (see oil shares). It would therefore be/is advantageous to be broadly diversified and therefore not to be invested in just one sector.

Next topic:

Narrow framing, or when we go through life with blinders on.

#psychologyinfinance
#psychologie
#aktienweisheiten #investor error