Outcome bias with rare payoffs

outcome bias with rare payoffs

Options' non-linear payoffs distort outcome bias in both directions: the buyer who hits a rare large gain over-learns from a lucky tail, and the seller who has not yet met the tail over-trusts a run of wins that only sampled the safe part of the distribution. Because options' outcomes are rare in the tails and common in the middle, the record's recent results are especially unrepresentative - and reacting to them is especially misleading.