Good decision vs. good results: Outcome bias in the evaluation of financial agents

Abstract

We document outcome bias in situations where an agent makes risky financial decisions for a principal. In three experiments, we show that the principal’s evaluations and financial rewards for the agent are strongly affected by the random outcome of the risky investment. This happens despite her exact knowledge of the investment strategy, which can, therefore, be assessed independently of the outcome. The principal thus judges the same decision by the agent differently, depending on factors that the agent has no influence on. The effect of outcomes persists in a setting where principals communicate a preferred investment level. Principals are more satisfied with the agent after a random success when the agent did not follow the requested investment level, than after a failed investment that followed their explicit request.

Underestimating randomness: Outcome bias in betting exchange markets

“…For instance, Gino et al (2009Gino et al ( , 2010 found that ethically questionable behavior is perceived as more unethical when it produces negative outcomes than when it produces positive outcomes. Consistent results regarding the outcome bias have also been found in legal contexts (e.g., Alicke et al, 1994;Mazzocco et al, 2004), salespeople's performance evaluations (Marshall & Mowen, 1993), and investment decisions (König-Kersting et al, 2021;Ratner & Herbst, 2005).…”

“…The students assessed decisions as more appropriate when the outcome was successful than when it was unsuccessful despite all other information being equal. After this study (Baron & Hershey, 1988), the existence of the outcome bias was demonstrated by many subsequent studies in laboratory settings (e.g., Brownback & Kuhn, 2019;Cushman, Dreber, Wang & Costa, 2009;Gurdal, Miller & Rustichini, 2013;König-Kersting et al, 2021;Marshall & Mowen, 1993;Mazzocco et al, 2004;Mowen & Stone, 1992;Rubin & Sheremeta, 2016). The outcome bias has also been found in various contexts.…”

“…The outcome bias is present whenever individuals tend to assign too much importance to the outcomes when evaluating past decisions (see, e.g., Baron & Hershey, 1988). Many laboratory studies have found an outcome bias in different settings, e.g., legal decisions (Alicke, Davis & Pezzo, 1994), medical decisions (Baron & Hershey, 1988), investment decisions (König-Kersting, Pollmann, Potters, & Trautmann, 2021;Ratner & Herbst, 2005) and ethical judgments (Gino, Moore & Bazerman, 2009;Gino, Shu & Bazerman, 2010). Consistent with the literature of psychology and economics, recent research in sports economics has also shown that decision-makers underestimate the role of randomness in match outcomes and assign too much weight to the observed outcomes when they evaluate performance (Flepp & Franck, 2021;Gauriot & Page, 2019;Kausel, Ventura & Rodríguez, 2019;Lefgren, Platt & Price, 2015).…”

Choice and Personal Responsibility: What Is a Morally Relevant Choice?

“…10 The psychological literature has also identified a phenomenon coined outcome bias, namely that people take irrelevant outcome information into account when evaluating the quality of a decision (Baron and Hershey, 1988;Kahneman, 2011;König-Kersting, Pollmann, Potters, and Trautmann, 2017). However, it appears unlikely that the observed choice effect is driven by an outcome bias.…”

Principle Transformational and Intructional Leadership Styles to Create Effective Schools: A Literature Review

“…In carrying out its functions and duties, the head of an educational institution or school principal needs to pay attention to good decisions, which are those that meet the following requirements: 2) the decision taken must meet the requirements of rationality and logic which means that it demands a scientific approach based on various theories and principals successfully developed by experts; 3) decisions taken using a scientific approach combined with creative, innovative, intuitive, and even emotional thinking styles; and 4) decisions taken must be implementable. decisions taken must be accepted and understood, both by the group leader responsible for carrying out various activities in carrying out the decision and by the operational implementers [31].…”