By Miles Clyne
What’s the difference between a good or bad decision? The outcome. The factors that determine outcomes can often be complex to the point of where even basic decisions are extremely challenging. Whether you agree with this or not, everyone can agree a decision is intended to bring us closer to a desired result. How many of your good decisions have not netted a positive outcome? Do you think a negative outcome was bad luck or a flawed decision process?
Luck does play a role in every person’s life. Many successful people claim they had a lot of luck along the way. Being in the right place at the right time including being born to the right parents, a great education and the right introductions to the right people along with other factors, out of their control, working favourably for them.
Recently I was trying to help someone understand a certain decision he was making would have to be heavily weighted with luck in order to work out the way he hoped. Luck happens, but it shouldn’t be the primary factor in decision making. I believed there were blind spots obvious to me but not to him in his decision. He was very certain moving ahead was the right thing to do. I’ll come back to this.
Decision making is about how well we can predict the future, full stop! Believing anyone’s decision making process is perfect would then suggest they could bet on the right horse every race or consistently make the best business decision. We can’t accurately predict the future so decision making will always carry risks. Regularly auditing our decision-making process for flaws is crucial.
Good decision making isn’t intuitive to most of us, we have to learn skills beyond gut instinct. Making better decisions is accepting we don’t know what we don’t know. Many of us make decision from the inside-out, where we will tend to focus on what we know and search for information that supports our desire for a positive outcome. Our decision then is driven by what is referred to as confirmation bias. If we are lucky we get the results we want. We can easily create a self-confirming loop that makes us more certain of the outcome. Ever hear anyone say, “I went over and over it in my head until I was sure I was making the right choice.” The comments are the same regardless if a positive or negative outcome was achieved.
To get to a better decision we need to be looking from the outside-in. We need to understand what we don’t know and what could go wrong as well as right. When we don’t fully understand what could go wrong we need to ask questions and we need to solicit and hear opinions that differ from our own. Given we don’t know what we don’t know, thinking otherwise is allowing our ignorance and luck to control outcomes, and that’s not a good decision. Unfortunately we can often see it in others, but not ourselves.
Back to my friend and why he likely needs luck on his side. He was telling me about a financial decision he had made. He based his decision on a number of factors; it was a friend’s advice (who may have been getting a commission on the sale), and that he understood the investment has had a long successful history and was quite safe and paid 8% maybe more. He convinced himself this was sufficient information and it was in his best interest to put a substantial amount of his savings into this investment when he was nearing retirement.
The red flags were jumping out at me. We are in an interest rate environment that pays 2 to 3 percent on safe investments. Earning up to and more than 4 times the safe rate has to have other risk factors that are not being considered or explained. Investing is not a free ride. Any recommendation where there is compensation to the individual making the recommendation has the risk of a bias the investor needs to take into consideration, and the greater the compensation the greater the potential bias. Consequently, choosing or being encouraged to make a large bet of one’s savings, especially near or in retirement on the above factors will likely require a disproportional amount of luck to have the desired outcome for the investor.
Learning the outside-in process of decision making is very important, especially when it comes to the more important decisions that can alter our standard of living. A great source to educate yourself on how to make better decisions is Farnam Street.
Remember, every decision that doesn’t take you closer to your goals, takes you further from them.