Known as "resulting," this bias makes it impossible to evaluate decisions fairly. We may deem a choice poor simply because it led to a loss, even if the process was sound. This prevents learning from probabilistic events and encourages chasing lucky outcomes instead of repeatable strategies.
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Entrepreneurs often get burned by a failed investment (like a bad ad agency) and become hesitant to invest in that area again. This is a cognitive trap. The first loss was the money spent; the second, more significant loss is the opportunity cost of not trying again with a better strategy.
A good outcome does not automatically validate the decision-making process, as luck plays a significant role. Howard Marks stresses the importance of intellectual humility in recognizing that a successful result could have stemmed from wrong reasons or randomness, a crucial distinction for repeatable success.
Post-mortems of bad investments reveal the cause is never a calculation error but always a psychological bias or emotional trap. Sequoia catalogs ~40 of these, including failing to separate the emotional 'thrill of the chase' from the clinical, objective assessment required for sound decision-making.
Every investment decision feels uniquely difficult in the present moment due to prevailing uncertainties. This mental model reminds investors that what seems obvious in hindsight (like buying in 2009) was fraught with risk at the time, helping to counter behavioral biases and the illusion of past clarity.
People justify high-risk strategies by retroactively fitting themselves into a successful subgroup (e.g., 'Yes, most investors fail, but *smart* ones succeed, and I am smart'). This is 'hindsight gerrymandering'—using a trait like 'smartness,' which can only be proven after the fact, to create a biased sample and rationalize the risk.
Kahneman's research reveals a critical asymmetry: we prefer a sure gain over a probable larger one, but we'll accept a probable larger loss to avoid a sure smaller one. This explains why investors often sell winning stocks too early ("locking in gains") and hold onto losing stocks for too long ("hoping to get back to even").
Leaders often fail to separate outcome from process. A good result from a bad decision (like a risky bet paying off) reinforces poor judgment. Attributing success solely to skill and failure to bad luck prevents process improvement and leads to repeated errors over time.
True strategic decision-making involves evaluating trade-offs and understanding the opportunity cost of the chosen path. If you cannot articulate what you chose *not* to do, you didn't make a conscious decision; you simply reacted to a situation and applied a strategic label in retrospect.
Humans are biased to overestimate downside and underestimate upside because our ancestors' survival depended on it. The cautious survived, passing on pessimistic genes. In the modern world, where most risks are not fatal, this cognitive bias prevents us from pursuing opportunities where the true upside is in the unknown.
To fight overconfidence before a big decision, conduct a "premortem." Imagine the investment has already failed spectacularly and work backward to list all the plausible reasons for its failure. This exercise forces engagement of your analytical "System 2" brain, revealing risks your optimistic side would ignore.