Can Financial Professionals Help Clients Learn Better from the Outcomes of Past Decisions?
Usually, good (bad) outcomes are the result of good (bad) decisions. If no other information is available, it is reasonable to use the outcomes to judge the quality of the underlying decision processes. When information regarding the quality of the decision process is available, however, we should consider that information instead of the outcomes in judging the quality of the decision process; this is true particularly when the outcomes are influenced by chance. An outcome bias can occur when individuals evaluate their decision based on the outcome of the decision and not on the information available to judge the quality of the decision process. With outcome bias, people might not revise bad decision processes if they happen to be lucky, or they might abandon logical reasoning if they happen to be unlucky. What can financial professionals do to help their clients draw the right lessons from both good and bad outcomes?
Kremena Bachmann’s article suggests that financial professionals who provide advice and thus reduce the uncertainty around choosing the best alternative can eliminate outcome bias. This uncertainty can be substantial, especially when people make investment decisions with risky assets. To eliminate this uncertainty and study what people learn from the outcomes of their investment decisions, the author set up an online experiment with students at the University of Zurich. In this experiment, participants were asked to make investment decisions in four rounds. In each round, participants chose from among four different investment alternatives. Each investment alternative had three possible payoffs—high, neutral, or low—with the payoff at the end of each round decided by chance. The possible payoffs were designed in such a way that one of the investment alternatives was better than the others. Participants were incentivized to find the best investment alternative: their compensation for participating in the experiment depended on their investment performance.