Good Decisions, Bad Outcomes
By Diego Alcalá Imagine two people making exactly the same investment decision, with the same information, at the same time. One ends up winning; the other ends
By Diego Alcalá · Mon Nov 02 2026 · Investing
By Diego Alcalá
Imagine two people making exactly the same investment decision, with the same information, at the same time. One ends up winning; the other ends up losing because of something neither could have foreseen. Here is a question for you: which one made a good decision? Most people would say the one who won. What did you think?
Because buried in that automatic answer is one of the deepest errors of judgment we make with money, especially when we look back at investments we have made.
We confuse the quality of a decision with the quality of its outcome. They are different things. Until we separate them, we will keep rewarding luck, punishing misfortune and, worst of all, learning the wrong lessons.
Making a good decision and getting a good outcome are different things
Every decision has two components worth untangling. There is what you control: your analysis, the information you gathered and the risks you considered. Then there is what you do not control: chance, circumstances and the unforeseeable. The outcome combines both. That is why a good outcome does not always prove a good decision, and a bad outcome does not always prove a bad one.
Michael Mauboussin, who has studied extensively how to separate skill from luck, proposes a simple test for determining how much chance an activity involves. Ask yourself whether you can lose on purpose. In chess, you can lose deliberately; that shows the importance of skill. In roulette, you cannot control the outcome of a bet. Investments almost always sit uncomfortably in between. Real skill exists, but chance carries enormous weight in the short term. That means short-term results are a very poor indicator of a decision-maker's ability.
We can think of four scenarios. 1) A good decision with a good outcome: merit. 2) A good decision with a bad outcome: bad luck. 3) A bad decision with a bad outcome: a lesson. And the most dangerous of all, 4) a bad decision with a good outcome: dumb luck. The last one is treacherous because it teaches you to repeat a mistake.
I have written before that markets, businesses and investments always involve an element of luck that can be minimized and assessed, but never eliminated. It follows that a loss, by itself, does not prove you made a mistake.
You may have analyzed things well, sized the risk and entered at a good price, yet still lose because something happened that was possible but unlikely. That is not an error of judgment; it is the normal price of playing a game with uncertainty. To get philosophical, it even reflects life itself. The real mistake would have been failing to consider that the loss was possible. The right question is never, "Did I lose?" It is, "Was my decision reasonable given what I knew then?"
The danger of learning the wrong lesson
This is the most delicate part, because it is where a bad outcome can cause damage that lasts for years. After a loss, the brain demands an explanation and almost always gives us the easiest one, rather than the most accurate.
Psychologist Baruch Fischhoff documented what he called hindsight bias. Once we know the outcome, we convince ourselves that it was predictable, that we "saw it coming." This poisons learning: it makes us believe the mistake was failing to anticipate the inevitable, when often it simply could not have been anticipated. People then overcorrect after a bad outcome, becoming excessively fearful after an unlucky loss or abandoning a sound strategy because of one bad quarter, for example.
The mirror image is equally dangerous. When we win through dumb luck, we learn that our recklessness "works" and repeat it until reality presents the bill. That is why Philip Tetlock stresses that people who develop their ability to make good decisions keep a record of their reasoning, not just their results. Without that record, every outcome tells us the story we find most convenient.
An honest postmortem of the decision
How, then, do we evaluate a decision fairly? By reconstructing how it was made, rather than judging how it ended. I have written about the importance of establishing an investment thesis before investing; the same framework works in reverse when examining a decision already made. Five questions are more than enough. 1) What was my initial thesis? 2) What information was available to me at the time, rather than what I know today? 3) Which risks did I understand and accept? 4) What margin for error did I allow? And 5) what reason for exiting had I defined beforehand? Answer those five questions honestly, and you will almost always know whether it was a good decision that went wrong or a bad decision disguised as bad luck. That distinction is everything, because only the latter gives you something real to correct.
Ultimately, it comes down to a single question, the cleanest test I know for judging yourself without letting the outcome cloud your judgment. With the information you had at the time, rather than what you know now, would you make that same decision again? If the answer is yes, you decided well even if you lost, and there is nothing to correct except to keep going. If the answer is no, you have found something to improve, even if you won.
Judging ourselves by the process rather than the score is one of the hardest things to do. It goes against how we feel and challenges the automatic thinking that dominates today's world. Yet it is probably what separates someone whose decision-making improves over the years from someone who merely accumulates scars and mistaken conclusions.
And you: the last time something went wrong, did you ask whether you had made a bad decision, or did you simply assume you had because you lost?
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Originally published in Spanish: Buenas decisiones con malos resultados.
Illustrative photograph: Wilfredor, Chess kit (2021), CC0 1.0.
