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Revisiting the process/outcome matrix


Revisiting the process/outcome matrix

Every so often, it is good practice for investors to reflect on and further enhance their investment process. For investors in the US market, this opportunity presents itself four times a year like clockwork during the quarterly earnings seasons. With the Q2 2019 earnings season wrapped up, I thought it would be a good time to revisit something that we’ve discussed before: the process/outcome matrix.


This matrix maps quality of decisions to the quality of outcome. To be a successful investor over the long term, you need to be obsessed with the top row and have an unrelenting focus on improving the quality of your investment process. But this is more difficult than it seems, because it is far easier for us to become distracted by the outcome of a decision (direct emotional feedback) than to remain focused on the quality of the process that led to the decision (which requires cold, emotionless rationality). Outlined below are several biases that hinder us from developing good process.

Motivated reasoning

Motivated reasoning, or confirmation bias, is the irrational behaviour of discarding/ignoring information that doesn’t conform to our existing beliefs. This bias is insidious because humans tend to form beliefs without much rigour – hear something repeated often enough by the media and the people around us, and we naturally start believing it without any fact-checking. And when we are challenged by new information, the prospect of being absolutely right or absolutely wrong about an internalised belief (even though we may not even know where that belief came from) causes us to raise our guard and forego knowledge in defence of our pride.

For investors who do spend a lot of time developing their thesis and fact-checking, motivated reasoning can be even more dangerous because now, being right or wrong isn’t just a matter of pride – there is also money involved. This may encourage one to not only ignore new information that doesn’t conform to one’s thesis, but to actively twist or interpret the information in such a way that it does conform. This kind of usually unconscious behaviour is detrimental to the development of good process and pushes the investor’s outcomes into the realm of luck.

Self-serving bias

Once a decision is made, the outcome can broadly be classified as good or bad. Self-serving bias is the behaviour of attributing good outcomes to one’s skill, and bad outcomes to luck, and afflicts everyone from investors to professional poker players to presidential candidates. It should be clear why this bias makes it difficult to develop good process – if all good outcomes are due to skill and bad outcomes due to bad luck, then by definition one already has a magic formula. It is like the town drunk driving home in one piece every night after ten schooners, believing himself to be a safe driver.


Even if an investor is acutely aware of self-serving bias, it can be difficult to avoid resulting. Resulting occurs when one ties decision quality to outcome quality. Unlike self-serving bias, where all outcomes are either due to skill or bad luck, resulting ties good outcomes with good process and bad outcomes with bad process, thereby ignoring the role of luck altogether. This is problematic because for any practice that deals in uncertainty, an element of luck is always present. A good investment process can be met with bad luck and produce a loss. If an investor starts resulting, they may be tempted to alter their process for the worse.

Of course, as with all things behavioural, simply knowing about these biases does not prevent one from committing them. Overcoming these biases requires great willpower and discipline and is something that comes only with practice. The Montgomery Global team recognises that every outcome, whether good or bad, is an opportunity to improve our process for our clients, and we truly believe that successful investing is a lifetime journey of education and development.


Daniel Wu is a Research Analyst at MGIM. Prior to joining MGIM in June 2016, Daniel was an analyst in the investment banking divisions of UBS and Goldman Sachs, where he covered the Infrastructure, Utilities, Technology and Media sectors.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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