Process vs. Outcome in 2 Mins

Imagine you are offered to play a game of coin toss wherein if its HEADS you WIN INR 1,000 and if its TAILS you LOSE INR 500.

Suppose you choose to play the game and guess what its TAILS and you end up losing INR 500.

Was your decision to play the game CORRECT?

If you just go by the outcome then it’s obvious it was not the right decision as you ended up losing INR 500.

However, anyone who has studied basic mathematics would know that the probability of either heads or tails coming up was 50%. Unfortunately for you tails came up.

But if you keep on playing this game for long enough say 500 coin tosses, the distribution of outcome will closely resemble the probabilities that is HEADS and TAILS will turn up 250 times each (50% of 500).

In such a scenario you will end up with a kitty of INR 125,000

Now your decision to play the game looks correct.

The key takeaway from this is that in any probabilistic field like investing, we cannot judge a decision right or wrong purely based on outcome. In the short term following the right process may not guarantee a favorable outcome but if your process is indeed correct you will end up with the desired outcome in the long run

In the above case of coin toss it was very obvious that the expected value of each coin toss was INR 250 (50% * Gain of INR 1000 + 50% * Loss of INR 500). Effectively you should get a profit of INR 250 on each coin toss if you play the game long enough. But on any given toss you would either lose INR 500 or win INR 1,000.

Unlike physical sciences which is governed by hard rules wherein a given input will always produce the same output like if you throw a ball up in the air it will always come down or if you switch on the bulb it will always light up, in social sciences (of which investing is a sub segment) the same input can lead to very different outcomes. Therefore probabilistic thinking and visualizing the future in terms of range of outcomes (although only one outcome will materialize) is key to successfully navigating social sciences including investing.

I will finish with a beautiful matrix on process and outcome devised by Michael Maubossin