The short version
- Experiments have found that people tend to rate the same decision as better when it turned out well. This is called outcome bias.[1]
- Any single win or loss is partly luck. One result on its own tells you very little about whether the decision was sound.
- So record whether you followed your rules, separately from profit and loss, and review trades in the four boxes that the two make together. A journal lets you catch the “broke a rule and won” trades that disappear when you look at profit and loss alone.
The same decision looks better when it turns out well
In 1988, Baron and Hershey reported five studies in which people rated decisions that others had made under uncertainty.[1] The decisions were about medical matters or money gambles. Participants understood that they had all the information the decision maker had.
An example from Experiment 1. Twenty US undergraduates rated 15 medical decisions on a seven-point scale, from −3 (incorrect and inexcusable) to +3 (clearly correct). In one case, a heart operation would relieve a man’s pain and extend his life expectancy, but 8% of patients died from the operation itself, and his doctor decided to go ahead. The description stayed the same, but in one version the operation succeeded and in the other the man died.
What they found. Cases with a successful outcome were rated 0.70 points higher, on average, than the matching cases with a failure. Of the last eight participants, seven said afterward that they should not have taken the outcome into account, yet those seven still rated the successful cases higher. In the money gamble studies, decisions that turned out well were also rated better.
Experiment 1 was repeated in 2023 with 692 participants recruited online, and the result pointed the same way: on the same −3 to +3 scale, successful cases averaged 1.78 and failures averaged 0.68.[2]
When outcomes do help. The original authors do not say outcomes are useless. When similar decisions are made again and again, results collected over many of them can teach you something about the odds.[1] In trading terms, that means looking at many trades together rather than judging a decision by a single win or loss.
What this research cannot say:
- The participants were students and online volunteers rating medical decisions and gambles. These were not studies of traders or trading.
- No study here shows that a lucky win makes people break their rules more often. The worry at the top of this article is a common one, not a research finding.
- The experiments show that ratings shift with the outcome. They did not measure how that changes later behavior or money results.
Four boxes: rules followed or broken, win or loss
Combine two questions, “Did I win or lose?” and “Did I follow my rules?”, and every trade falls into one of four boxes. Here, your “rules” means the conditions you set for yourself before the trade, such as your entry conditions, stop-loss and position size. This article does not tell you what your rules should be.
Swipe the table sideways to see all columns →
| Won | Lost | |
|---|---|---|
| Followed my rules | Followed and won You stuck to your plan and the result was good. Don’t assume the win was all skill. Count it alongside the other boxes. | Followed and lost A loss within your rules. Don’t change your rules or method after a single loss. Look at a batch of trades together. |
| Broke my rules | Broke and won The easiest box to miss. You made money, but you stepped outside your own conditions. Don’t treat it as permission to do it again. Mark it and write one line on what you broke. | Broke and lost The easiest box to notice. Don’t be too hard on yourself. Write one line on what you broke and how you felt. |
Why catch the “broke a rule and won” trades?
If you look only at profit and loss, a trade where you broke a rule and won just blends in with your other wins. Because the result was good, it is exactly the kind of trade that, as in the research above, tends to feel like a good decision. If you keep that feeling and do the same thing next time, breaking your rules may start to feel normal.
On the other hand, a trade where you followed your rules and lost tends to feel like a bad decision, simply because the result was bad. After several losses on plan, you may want to throw out the rules themselves. But wins and losses over a small number of trades swing a lot by chance. Wait until you have a reasonable number of trades before you decide whether to change your rules (see how many trades it takes to trust a win rate).
Either way, if you note whether you followed your rules at the time of the trade, you can separate these trades later. If you try to remember afterward, knowing the result may color your memory. That is why it helps to write it down right after the trade, separately from profit and loss.
An example count
Take one or two weeks of trades and count how many fall into each box.
Swipe the table sideways to see all columns →
| Box | Trades | What to check |
|---|---|---|
| Followed and won | 6 | See it as one part of all 12 trades where you followed your rules |
| Followed and lost | 6 | Was the loss within your rules (stop distance and size as planned)? |
| Broke and won | 3 | Which rule did you break? Is it the same rule each time? |
| Broke and lost | 5 | Which rule did you break, and how did you feel? |
(Made-up numbers as an example. They are not meant to show a typical split.)
In this example, you broke your rules in 8 of 20 trades, and 3 of those were wins. If you only looked at profit and loss, those 3 would simply look like trades that went well. Sorting into four boxes shows a separate fact: you stepped outside your rules 8 times.
With only a few trades, the count in any box can swing by chance. Try not to draw conclusions too early. Keep counting for a few weeks. For a monthly review, see how to review a month of trading. For the moments when rules are hardest to keep and how to log them, see why you break your own trading rules, and for the overall journal format, what to write in a trading journal.
If you would rather count in a spreadsheet first, the free trading journal template has a column for whether you followed your rules.
In Tiltnote you can answer “Did you follow your rules?” with Followed or Broken for each trade, and the Review screen shows figures such as the share of trades where you followed your rules.
About this page
This article is not investment advice, and it does not recommend any trade. It also does not mean that following your rules will make you win. You can follow your rules and still lose, and whether your rules suit you is something to check in your own records. The studies here were not studies of traders. If money or trading is causing you distress, or you find it hard to stop, please don’t carry it alone: talk to someone close to you or a support service where you live.
Sources
- Baron, J., & Hershey, J. C. (1988). Outcome bias in decision evaluation. Journal of Personality and Social Psychology, 54(4), 569–579. https://doi.org/10.1037/0022-3514.54.4.569
- Aiyer, S., Kam, H. C., Ng, K. Y., Young, N. A., Shi, J., & Feldman, G. (2023). Outcomes affect evaluations of decision quality: Replication and extensions of Baron and Hershey’s (1988) outcome bias experiment 1. International Review of Social Psychology, 36(1), 12. https://doi.org/10.5334/irsp.751