Vishal Khandelwal’s Safal Niveshak is perhaps India’s go-to-site for lessons in investing, especially the behavioural aspects of it – plenty of blogs and podcasts loaded with insights. Here’s one such blog from his series on The Psychology of Investing, that helps us understand the role of skill and luck in investing and life in general. Vishal talks about a common human cognitive bias we all suffer from – the Outcome bias i.e, judging the quality of a decision on an inherently probabilistic event based on the outcome rather than the thought process behind the decision.
“There’s a deeper truth in investing that many of us forget, which is that you can do everything right and still lose money. And you can do everything wrong and still make a profit. I’ve been there and done that. And this is because the market, like life, doesn’t always reward effort, process, or discipline on schedule. Sometimes, and often in the short run, it’s just the roll of the dice.”
He draws heavily from the poker champion and author of the book ‘Thinking in Bets’, Annie Duke’s work in cognitive-behavioural decision science, where she refers to this aspect as ‘resulting’.
“In poker, players constantly make decisions under uncertainty. You could have the odds stacked in your favour and still lose the hand. Or you could play recklessly and win. But if you start assuming that winning equals good strategy, and losing equals bad judgement, you’ll learn all the wrong lessons.”
And the wrong lessons can hurt us in future:
“The real problem is that outcome bias not only distorts our view of the past, but that it shapes our future decisions. If a bad decision leads to a good result, we often reinforce it. We do it again. Worse, we up the stakes. It becomes a habit. And like my friend, we trust the pattern until it breaks. When that happens in investing, it may lead to financial ruin.
Outcome bias also leads us to punish good behaviour unfairly. Imagine someone who stuck to their asset allocation plan, avoided chasing hot stocks, and rebalanced regularly, but ended up underperforming in a year when speculative bets did well. That person might feel foolish, even though they followed a sound process.”
Having highlighted the problem, he helps us with how to deal with it:
“I think the first step, like always, is awareness. Just knowing that this bias exists is powerful. Start by asking: Would I have made this same decision if the outcome had been different? Would I consider this person insightful if their bet hadn’t worked? Questions like these help you step back and see the process more clearly.
The second step is building systems. Whether it’s journaling or creating checklists, systems help anchor you to your own reasoning. They create space between stimulus and reaction. When things go well, you can ask: did I follow my process, or did I just get lucky? When things go wrong, you can say: I did what I thought was right, and I’ll live with that.
The third step is cultivating humility. It’s okay to admit when luck helped. It’s okay to admit when you were wrong for the right reasons. The market doesn’t owe you rewards for good behaviour. But over time, sound decisions compound, even if some of them hurt in the short run.
Finally, surround yourself with people who ask better questions. People who won’t just say “Well done” when something works, but will ask, “How did you think through that?” or “What made you take that call?” These are the conversations that help you grow.”
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