Michael Mauboussin is considered an expert in the field of behavioral finance and has some famous books on the topic including, Think Twice: Harnessing the Power of Counterintuition and More More Than You Know: Finding Financial Wisdom in Unconventional Places.
From 2013, Michael Mauboussin: Outcome Bias and the Interpreter
How Our Minds Confuse Skill and Luck
- Outcome bias occurs when people judge outcomes without considering the true quality of the decision.
- This bias is rife in business, investing, sports, and politics.
- There is a module in the left hemisphere of the brain called “the interpreter” that takes any effect that it sees and effortlessly and rapidly creates a cause to explain it.
- The interpreter is a natural pattern seeker and knows nothing of luck. This leads to numerous poor decisions.
- To manage the interpreter it is useful to know ahead of time how much luck determines results in an activity and to focus on one’s decision-making process in instances where luck is ample.
Michael Mauboussin: Outcome Bias and the Interpreter – Introduction
Here is one quote from Monday morning’s media:
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“Each and every week we see bad coaching decisions in the NFL, but never, and I mean never, have I seen one as dumb as the decision Patriots coach Bill Belichick made Sunday night against the Colts. His brain was more frozen than Ted Williams’.”
Numerous press accounts echoed this sentiment. Here was the situation that created the stir. On the evening of November 15, 2009, the New England Patriots were leading the home team, the Indianapolis Colts, by the score of 34-28. There were just over two minutes remaining in the game, the Patriots had the ball on their own 28 yard line, and it was fourth down with 2 yards to go.
Bill Belichick, the head coach of the Patriots, had two choices. He could instruct his team to punt, which would likely give the ball to the talented Colts around their own 35 yard line and force them to march downfield to score the game-winning touchdown in limited time.
Or Belichick could go for it on fourth down. A successful conversion would effectively win the game for the Patriots and hand the Colts their first loss of the season. But a failure to convert would turn the ball over to the Colts at a very attractive position on the field, substantially increasing the probability that the Colts would score and win.
The Patriots had faced a similar situation seven weeks earlier against the Atlanta Falcons. They went for it, got the first down, and clinched the game. On this night, the Patriots went for it again and were ruled down just shy of the marker. Moments later, the Colts scored a touchdown. Final score: Colts 35, Patriots 34. Belichick was unapologetic as he addressed his team the next day: “My decision there at the end was based on what I felt was best for the football team and our best chance to win. I’m just telling you I did what I thought was best. And it didn’t work out.” Later, he added, “The sign on the door when you walk out says ‘ignore the noise.’ That’s the most important thing. Ignore the noise. I hope you believe it because it’s the truth. I’ll always tell you the truth.”
Did Belichick make the correct decision? The sports analytics community quickly rendered its verdict, and the consensus was that he did the right thing. Brian Burke at Advanced NFL Stats summed it up by saying, “The better decision would be to go for it, and by a good amount.” While Burke’s analysis relied on numerous assumptions, it would have been hard to assign credible probabilities that would have flipped the odds in favor of punting.
If Belichick indeed made the right decision from a statistical standpoint, why was he excoriated in the press? We argue that the reason is something called outcome bias, which says that “people take outcomes into account in a way that is irrelevant to the true quality of the decision.”4 Outcome bias is rife in the worlds of business, investing, sports, and politics. We will discuss the mental processes that underlie outcome bias and will finish with some ideas about how to cope with it.