Why “Resulting” is Dangerous in Both Poker and Investment Management

During times of crisis, we often read sensationalist reports about tail risk strategies that result in astronomical returns. However, these strategies aren’t meant to be a standalone solution, but rather a small part of a diversified portfolio. Tail risk hedging is a type of insurance and, as with any type of insurance, it’s important to weigh its cost against the probability of the insured event occurring. A good portfolio is one that is robust to different market environments. That is why the management team at CalPERS likely made a good decision when they evaluated their tail risk hedging program holistically and decided to abandon it based on cost-benefit analysis. Controversy and criticism came about due to the timing of the decision, which occurred just before the latest market crisis. This is what Annie Duke, former poker player turned author, calls “resulting” – a term she uses to describe evaluating decisions purely based on their outcomes rather than the process used to arrive at them. Resulting can be a dangerous bias in both poker and investing, because there are so many unknown factors that are outside of a player or investor’s control. Just because the result of a decision ended in a sub-optimal outcome doesn’t mean it was bad given all the information that was present at the time. In vocations where there is a good deal of luck involved in short-term results, the decision-making process is more important to focus on rather than the outcome. We should all be wary of those who claim to have seen the COVID-19 induced market crash coming, as their process might be telling us something their results are not.