Imagine two investors.
The first puts his entire retirement savings into a single speculative investment. He hasn’t researched it particularly well, but someone he trusts tells him it’s going to be the next big thing.
Six months later, the investment doubles.
The second investor spends considerable time researching an opportunity. She examines the business, considers the risks, and determines how much she can afford to lose. She invests a modest portion of her portfolio.
Six months later, the investment falls by 30%.
Who made the better decision?
Most people would instinctively point to the first investor. After all, he doubled his money while the second investor lost nearly a third of hers.
But what if the first investor had a substantial chance of losing everything?
And what if the second investor had made a reasonable assessment of the opportunity, understood the downside, and invested an amount she could comfortably afford to lose?
Would we still consider the first decision better?
This illustrates one of the most persistent mistakes in how we evaluate decisions.
We confuse the quality of a decision with the quality of its outcome.
And that confusion can be expensive.
The Problem With Judging Decisions Backwards
When we know how something turned out, it’s remarkably difficult to evaluate the original decision without allowing that knowledge to influence our judgment.
Psychologists call this outcome bias.
In a well-known 1988 study, researchers Jonathan Baron and John Hershey found that people rated decisions more favourably when they were told those decisions had produced successful outcomes, even when the information available to the decision-maker was otherwise identical.
In other words, knowing the result changed how people evaluated the decision itself.
Think about how often we see this in everyday life.
An entrepreneur takes an enormous financial risk, builds a successful company, and becomes celebrated for having the courage to bet everything.
Another entrepreneur makes a similar bet, loses everything, and is criticised for being reckless.
Yet the original decisions may have been almost identical.
One happened to succeed. The other didn’t.
We see the same phenomenon in investing.
Someone buys a stock because a friend recommended it. The stock rises, and the investor concludes that trusting the recommendation was a good strategy.
Someone else carefully evaluates a business, buys its shares at what appears to be a reasonable valuation, and subsequently loses money because of an unexpected development.
The first investor feels clever. The second questions their judgment.
But the outcomes tell us much less about the quality of their decisions than we might think.
Of course, outcomes aren’t irrelevant.
Over time, the results of repeated decisions can tell us a great deal about whether our approach is working.
But a single outcome is a particularly unreliable measure of decision quality.
A good process can produce a bad result. A bad process can produce a good result.
The danger comes when we mistake the latter for evidence that our process was sound.
Success Can Be a Terrible Teacher
Failure has an obvious disadvantage. It hurts.
But it also has one useful characteristic: it tends to make us question what we did.
Success doesn’t always have that effect.
When something works, we’re inclined to repeat it. Sometimes that’s sensible. Other times, we’re simply reinforcing a behaviour that happened to produce a favourable outcome.
Consider someone who invests heavily in a rapidly rising market.
Their investments perform exceptionally well for several years.
They conclude that their strategy is sound, perhaps even that they have a particular talent for identifying opportunities.
So they increase their exposure.
But what if much of their success came from favourable market conditions rather than superior judgment?
The better their investments perform, the more confident they become.
And the more confident they become, the greater the risks they’re willing to take.
The strategy may appear increasingly successful right up until the point when the underlying conditions change.
This is why a long period of success doesn’t necessarily demonstrate that someone has been managing risk well.
Sometimes it merely demonstrates that the risks haven’t materialised yet.
Seeing the difference is especially important because success can often encourage us to increase the size of our commitments.
A mistake involving $1,000 is one thing.
Making the same mistake with $1 million because the first ten attempts happened to work is quite another.
Success can teach us what worked. It doesn’t necessarily teach us why it worked.
And unless we understand the difference, we may be learning precisely the wrong lesson.
Probability Is Only Half the Risk Equation
When people talk about risk, they often focus on the probability of something going wrong.
What’s the likelihood that this investment will lose money?
What’s the probability that this business will fail?
How likely is it that I’ll need to work longer than planned?
These are sensible questions.
But they’re incomplete.
Because the probability of an adverse outcome tells us nothing about whether we can afford the consequences.
Imagine being offered an opportunity with a 90% chance of doubling your money and a 10% chance of losing everything you invest.
On the face of it, those odds look attractive.
For every $100 invested, the expected ending value is $180: a 90% chance of receiving $200 and a 10% chance of receiving nothing.
That’s an expected gain of 80%.
But would you invest your entire retirement savings?
I wouldn’t.
Not because the odds are unattractive, but because the consequences of being wrong could be devastating.
A 10% probability of losing everything is not a small risk when everything is what you stand to lose.
Now imagine the same opportunity, but instead of committing your entire retirement savings, you invest 1% of your portfolio.
The probability of failure hasn’t changed.
The investment hasn’t become intrinsically safer.
But the consequences of failure have changed dramatically.
You could lose the entire investment and still have 99% of your portfolio remaining, before accounting for any other changes in its value.
This illustrates an important principle:
Risk isn’t just the probability of being wrong. It’s also the consequence of being wrong.
And the consequence depends not only on the investment or decision itself, but also on your personal circumstances.
A $50,000 loss might be a manageable setback for one person and a financial catastrophe for another.
The same opportunity can therefore be reasonable for one person and completely inappropriate for someone else.
That is why I have always been uncomfortable with investment discussions that focus primarily on potential returns.
Returns matter.
But so does the ability to withstand the outcomes we don’t want.
The Hidden Cost of Being Unable to Recover
There’s another aspect of risk that deserves more attention.
Some losses are recoverable.
Others permanently change what we’re able to do next.
Suppose you have $100,000 invested.
If your portfolio loses 10%, you’re left with $90,000. You need an 11.1% gain to recover your original capital.
If you lose 50%, you’re left with $50,000. You now need a 100% gain to get back to where you started.
And if you lose 80%, you need a 400% gain just to break even.
| Loss | Gain needed to recover |
|---|---|
| 10% | 11.1% |
| 25% | 33.3% |
| 50% | 100% |
| 80% | 400% |
| 90% | 900% |
This mathematical asymmetry has enormous implications.
As losses become larger, recovery becomes disproportionately more difficult.
And that’s before considering the time required to recover.
For someone in their 30s, a major financial setback might leave decades to rebuild.
For someone approaching retirement, the same setback could permanently alter their choices.
This doesn’t mean older investors should avoid all risk.
In fact, avoiding risk entirely introduces other risks, including the possibility that inflation will erode purchasing power or that investments won’t generate sufficient returns.
But it does mean that the capacity to recover from a loss should influence how much risk we’re prepared to take.
This is one reason I believe the ability to remain financially viable is so important.
You only compound what you keep.
An investment strategy that produces spectacular returns for several years but eventually wipes out your capital doesn’t allow you to enjoy the benefits of long-term compounding.
The same principle applies beyond investing.
A business decision that could destroy an otherwise healthy company may be unacceptable even when the probability of success appears attractive.
A career decision that sacrifices financial security for an uncertain opportunity may have consequences extending far beyond the immediate loss of income.
The question isn’t simply whether the decision might work.
It’s whether you can live with what happens if it doesn’t.
Good Decisions Preserve Future Choices
This brings us to something I think is frequently overlooked.
When evaluating a decision, we tend to compare the immediate outcomes of the available alternatives.
Which investment offers the greatest return?
Which business opportunity has the highest potential?
Which career move offers the largest salary increase?
But there’s another consideration.
What choices will I still have after making this decision?
Imagine two people who want to start a business.
The first resigns from a well-paying job, invests a substantial portion of their savings, and spends a year building a product before discovering whether customers want it.
The second keeps their job, identifies a problem worth solving, develops a modest initial solution, and tests it with potential customers before committing significant resources.
Neither approach guarantees success.
The first entrepreneur might build a hugely successful business.
The second might discover that nobody wants the proposed solution.
But notice what happens if both are wrong.
The first may have lost a year of income, a substantial amount of capital, and perhaps the financial flexibility to attempt something else.
The second may have lost a relatively small amount of time and money, while gaining useful information about the market.
And because the second entrepreneur has preserved more of their resources, they remain in a position to try something different.
This is the value of preserving optionality: retaining the ability to respond to new information and changing circumstances.
It’s particularly important when decisions involve substantial uncertainty.
If you can test an assumption cheaply before making an expensive commitment, why wouldn’t you?
If you can explore an opportunity without surrendering your existing security, why make the exploration dependent on a dramatic leap?
And if you can structure a decision so that an unfavourable outcome leaves you with useful information rather than permanent damage, isn’t that worth considering?
Sometimes the best decision isn’t the one with the greatest immediate upside.
It’s the one that gives you a reasonable opportunity to benefit while preserving your ability to make good decisions tomorrow.
But Preserving Options Has a Cost Too
There’s an important qualification here.
If we take the idea of preserving options too far, we can end up doing nothing.
We avoid making commitments because we want to keep every possibility available.
We postpone investments because markets might fall.
We delay starting businesses because our ideas might fail.
We remain in unsatisfying careers because changing direction involves uncertainty.
And we tell ourselves that we’re being prudent.
But indecision isn’t necessarily risk-free.
Keeping money entirely in cash can expose us to inflation.
Avoiding investments can mean missing years of potential compounding.
Postponing a business idea indefinitely can mean losing the opportunity to learn, build relationships, or establish something valuable.
Even maintaining the status quo is a decision, whether we acknowledge it or not.
So the objective cannot simply be to minimise the possibility of loss.
If that were the case, the safest strategy would often appear to be doing nothing.
And doing nothing can carry substantial long-term costs.
The more useful objective is to take risks deliberately, in proportion to what we can afford to lose and what we stand to gain.
That requires judgment.
Not the elimination of uncertainty, but an understanding of which uncertainties are worth accepting.
How Should We Judge a Decision?
If outcomes alone aren’t sufficient, what should we use instead?
I think there are four questions worth asking.
First, what did I reasonably know at the time?
A decision should be evaluated using the information that was available when it was made, not information that became apparent afterwards.
That doesn’t excuse ignoring evidence or failing to investigate something important.
But it does recognise that hindsight gives us knowledge the original decision-maker didn’t possess.
Second, were my assumptions reasonable?
Every meaningful decision involves assumptions.
The problem isn’t that we make them. It’s that we sometimes forget we’re making them.
A retirement plan might assume a particular investment return.
A business plan might assume customers will pay a certain price.
A career decision might assume a particular industry will continue growing.
Good decision-making requires us to identify those assumptions and consider what happens if they prove wrong.
Third, could I afford the downside?
Not merely in financial terms, but in terms of time, health, relationships, responsibilities, and future opportunities.
A risk that is perfectly acceptable in one set of circumstances might be unacceptable in another.
Fourth, what would I learn regardless of the outcome?
This is especially useful when dealing with uncertainty.
Some decisions can be structured as experiments.
Instead of committing everything to an assumption, we can make a smaller commitment that produces information.
If the results are encouraging, we can commit more.
If they aren’t, we can reconsider.
The aim isn’t to avoid being wrong.
It’s to make being wrong less costly, while increasing our understanding of what might work.
The Real Measure of a Good Decision
Over the years, I’ve sat on boards and investment and risk committees where decisions involved substantial amounts of money, competing priorities, and uncertain outcomes.
One thing that experience reinforced is that even careful analysis cannot eliminate uncertainty.
You can examine the numbers.
Challenge assumptions.
Consider alternative scenarios.
Seek expert opinions.
And still arrive at a decision that doesn’t produce the outcome you hoped for.
That doesn’t necessarily mean the decision was poor.
Nor does a favourable result prove that the original reasoning was sound.
What matters is whether the decision was justified by the information available, whether the risks were understood, and whether the consequences were acceptable.
And, importantly, whether the decision left sufficient capacity to respond when circumstances changed.
Because life doesn’t give us just one decision to make.
We make thousands of them.
Some work. Some don’t.
Some produce unexpected opportunities. Others produce disappointments.
And occasionally, something that initially looks like a failure turns out to be the beginning of something better.
We cannot control every outcome.
But we can improve how we make decisions, how much we commit to them, and how we respond when reality differs from our expectations.
Perhaps that’s a better way to think about success.
Not as a perfect record of correct predictions.
Not as a life in which nothing ever goes wrong.
But as the cumulative result of decisions that allow us to learn, adapt, recover, and continue moving forward.
You don’t have to be right every time to build a successful future.
You need to make decisions that allow you to survive being wrong—and benefit when you’re right.