Process vs Outcome and hindsight trades

In the last few days, I had some small talk about hindsight trades with Tom-Elias Knosp . In today's post, I want to share my thoughts on that.

Process vs Outcome

I first want to talk about Process vs Outcome, which is really important in trading. Most of the time, we only focus on the outcome, not only in trading but generally in life. If you notice it, you will see how much this happens. Did this trade work? Yes? No? Did the decision to help Greece in financial trouble work? Yes? No? Did the CEO make more money for the firm? Yes? No? All of this is focused on the outcome, and right, that's what matters at the end. So why not focus on that? The main reason is that the outcome isn't that important, especially in repeating decisions. You can have the right reasoning but still be wrong, or have the wrong reasoning and be right. We always think there is a perfect cause-and-effect relationship between process and outcomes—that a positive result always stems from a good decision, and a negative result from a bad one. This is dangerous. If you make the wrong judgments regarding past decisions, you draw misguided conclusions and are therefore likely to make worse decisions in the future, only with even more confidence. For example, one way to fix this is if Goldman Sachs employees don't get their paycheck based on the profit they made for the firm but based on their process and how good it was. If you have the right Expected Value or Process, the Outcome will take care of itself. So don't beat yourself up for trading losses but do for failing to follow your process.

Hindsight

Now, how does this translate to hindsight trading? Let's introduce two concepts: ex post, short for ex post facto, Latin for 'after the fact'—to refer to evaluating a decision based solely on outcomes; and ex ante—'before the fact'—to refer to evaluating a decision based on the information available at the time, the analysis that led to the decision, and the judgments of probabilities made before the real-world outcomes could be known. When looking at trades in hindsight, we are, first of all, always looking at the outcome, which, as stated above, isn't even that important, and it's almost never possible to focus on the process after it has happened. So, it is good to train your brain to recognize patterns better in the future, but it is absolutely no reflection of your performance as your brain might make it seem. Try to focus far more on the soundness of the decision-making analysis and process than on the result; be obsessed with this kind of thinking and train your brain. But note, you are only able to focus on the process if you have one. Do you have one? Have you written down when you start to trade? When to enter? When to size up? When not to trade? THE RESULTS WILL FOLLOW IF YOU FOCUS ON THE PROCESS. BE OBSESSED WITH IT.

Just some small thoughts

Thanks,

Finn