“In any moment of decision, the best thing you can do is the right thing. The worst thing you can do is nothing.” — Theodore Roosevelt
Hundreds of super-smart people have written thousands of books on decision making. Many of them have won the Nobel Prize and other prestigious awards.
I have never won an award in my life. Not even in school. The world doesn’t need another post on decision making by a pseudo-smart guy. But I have this weird itch to talk about it. And I’m going to scratch that itch.
Most of us are capable of making smart choices. We are the most intelligent and most advanced species on the planet. But our history suggests we all have some good stories about our bad decision making skills.
So, why do we make poor decisions? We don’t want our decisions to be bad. Neither do we wake up every morning, look in the mirror and say, “Yay! I’m going to make some really f*cked up choices today!”
There are so many situations and so many variables at play that it’s incredibly difficult to have a single formula — the Ultimate Decision Making Formula — that applies to all kinds of decisions.
We make thousands of decisions every day. Most of them are inconsequential and don’t need much thought. But some of our decisions leave a lasting impact on our careers, relationships, health, and other aspects of our lives.
A number of factors influence us into making poor decisions. Understanding how they contribute to our poor choices could help us get better at decision making.
Most Common Causes of Poor Decisions
We have a tendency to associate one thing with another. If someone is intelligent, we assume he is also excellent at decision making. If someone is wealthy, we assume she is also a wise person. And if someone is…well, you get the idea.
High intelligence does not automatically make us better at decision making.
The most intelligent individuals belonging to the most advanced species have made horrible decisions in business, relationships, health and other aspects of life.
If we are so advanced, what causes us to make poor decisions? Here are a few things I can think of:
1. Misplaced objectives
In an uncertain world, we make almost all of our decisions based on the perceived reward versus punishment.
We decide based on how we expect to be rewarded if the decision turns out right…and how we expect to be punished (probably by withholding the reward) if we are wrong.
All that is fine. But things go awry when we misplace the objective to conform to our own expectations, ego, an authority or the group we are part of.
When we misplace the objective, we stray away from making the right decision that part of us knows we should have made.
And then we try to justify — logically and rationally — why it was the right choice. Even though it gives us a good story to tell, it doesn’t make our decisions better.
2. Analysis paralysis
Analysis paralysis is when we spend way too much time overthinking or over-analyzing a problem.
Instead of moving forward with a decision, we get stuck in an analysis loop. The inaction could lead to missed opportunities or unexpected punishments.
Analysis paralysis often occurs when there is an undefined number of variables at play. The facts and data don’t lead us to a pros and cons list (or rewards vs punishment) with a high degree of confidence.
3. Waiting for more information
Sometimes when we don’t have the data needed to make a decision, we choose to wait for it. We spend way too much time waiting.
We often have to make decisions based on incomplete data, some gut feeling, and past experiences. And then keep adjusting as new information becomes available. Don’t hesitate to change your mind when the facts change.
If we wait for 100% data, it will be too late. Even Amazon.com founder Jeff Bezos doesn’t wait for all the data. He says he makes decisions based on about 70% of data. That’s good enough for him.
Waiting could mean missing out on some wonderful opportunities.
4. Not thinking it through
It’s important to collect facts and data, and to draw from our past experiences while making a decision.
But researchers have found that we don’t spend enough time thinking about a problem. Thinking doesn’t feel like work and progress, and your superiors probably want to see you working. So you work.
According to researchers, most decision makers allocate no more than 25% of their time to think about a given problem. Instead, we choose to spend extra amounts of time collecting data and information.
Without giving sufficient time to think it through, we fail to gain context of the situation. Context comes from a broad and deep understanding.
A Bollywood movie is incomplete without an item song. Similarly, any discussion about decision-making is incomplete without a reference to Daniel Kahneman. So, here it is.
He says we have an intuitive feeling and opinion about almost everything coming our way. We like or dislike someone without even meeting or getting to know them well. We feel that a company is going to succeed even without analyzing it.
When we make a decision without thinking it through, we are trying to satisfy our existing opinions and intuitive feelings. We need to spend more time reflecting on the problem at hand and updating our understanding.
5. Confusing luck with skill
Bill Gates once said, “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.”
We are supposed to evaluate our past decisions in a way that helps us minimize the probably of future mistakes. But we evaluate our decisions based on the outcome, not the process.
When we get the desired outcome, we happily accept that it was our skill even if it was luck or another factor beyond our control.
We don’t critique our decisions when the outcome is similar to what we expected. We critique them only when the outcome is disappointing.
When we confuse luck with skill, we are giving ourselves a false but strong belief that we are in control of things. That puts us at the risk of making stupid decisions that we would regret.
6. Our own intelligence
When you spend more than two decades of your life and a vast amount of your parents’ money on education, it’s difficult to accept that higher education and good decision making are two different things. Some educated people are good at making decisions, but not all.
The intelligent and educated people have acquired a lot of knowledge. They have their own worldview. They try to fit the real world in one of their own boxes of theories and explanations instead of accepting it as it is.
The smart people have an insightful and detailed explanation why something went wrong. They can pull out a 132-page document full of jargon and complex calculations to convince you why it was the right decision. My illiterate mom can give a simple, clear, one-sentence explanation on the same thing.
If the same people are asked to judge the decisions of others, they take a more objective view.
It happens because when thinking about our own decisions, part of our brain is trying to justify with elaborate stories. But when we look at others’ decisions, we are unaware of the internal dialog inside that person’s head. We just look at the data, process, analysis and actions.
Sometimes even the most complex problems require simple solutions. But our intelligence pushes us to complex solutions.
What’s the use of all our knowledge, degrees, and experiences if we do the same simple things that even a layman can do? It doesn’t set us apart. We need to concoct a complex solution to prove to the world how valuable we are!
7. Recent embarrassment
Let’s say you have suffered a setback recently. Maybe you got fired or transferred to a location where nobody wants to go. Or maybe you took too much of consumer debt and now you are unable to pay the EMIs on time. You are forced to cut back on spending, sell your car, or move to a smaller house.
The consequences of your past bad decisions are now visible to your friends, acquaintances, colleagues, and most importantly, relatives.
Now you are embarrassed. This embarrassment and the baggage of recent events are going to cloud your thoughts and decisions — most likely in a negative way.
8. Misplaced focus on the individual player
In his book Think Twice, Michael Mauboussin sheds light on making decisions in complex adaptive systems.
A complex adaptive system has a large number of different agents, each with their own rules. The stock market is a good example. There are millions of traders, individual investors, institutional investors, brokers, etc. All of them have their own processes, rules, and roles in the market.
The agents in a complex adaptive system are interacting with one another in some way. All of their interactions create a higher level system (the stock market itself, in this case) that has its own properties and characteristics.
The behavior and characteristics of the stock market are entirely different from those of an individual player within the market.
Nobel Prize winning physicist Philip Anderson wrote in his essay More Is Different, “The behavior of large and complex aggregates of elementary particles, it turns out, is not to be understood in terms of the simple extrapolation of the properties of a few particles. Instead, at each level of complexity entirely new properties appear.”
We have an innate desire to understand the cause and effect. The moment something happens, our mind rushes to find an explanation as to what caused this.
We see it all the time in the stock market. The market rallied today because of X. The market crashed yesterday because of Y.
But when we are dealing with complex adaptive systems, there is no way to understand what happened to the whole system by studying an individual part.
There are dozens or maybe hundreds of variable at play. Our cause-and-effect mentality prompts us to zero in on a single part to explain the effect.
This misplaced focus on an individual component makes us believe that we understand what caused a given effect on the entire system. Sometimes even the best individual-level actions lead to bad consequences for the entire system.
9. Our environment
Directly or indirectly, our environment has a huge impact on our decision making. Most of the time we don’t even know how we are being influenced because the environment influences us subconsciously.
To prevent the situations from influencing our decisions, we need a high degree of self-awareness. Peer pressure is just one example of our environment influencing us into making decisions that might not be good for us.
There is a famous study on how the type of music played in stores subconsciously influences our purchase decisions. Researchers placed French and German wines next to one another with the respective country flags. The two wines were similar in price and quality.
A casual shopper would compare them and place one in their shopping cart. After the checkout, researchers approached the shoppers and asked why they bought one type of wine over the other. They would say something good about the wine they purchased or why it goes perfectly with their upcoming plans.
Researchers also asked them whether they noticed the music playing in the background and whether it influenced their purchase decisions. Almost all shoppers said it didn’t influence their purchase decision, though some acknowledged hearing the music.
Now comes the kicker. Researchers then looked at the shopping data. When the German Bierkeller music played in the background, 73% consumers bought the German wine.
When the supermarket played the French accordion music, French wine accounted for a staggering 77% of sales.
Coincidence? No. Researchers call it “priming.” But about 86% shoppers denied that the music had any influence on their purchase decisions.
10. Know it all attitude
Phillip Tetlock, a professor at the University of Pennsylvania, conducted a 20-year-long study to find out how accurate experts are at making future predictions.
He analyzed 82,361 expert predictions and concluded that the experts are “not much better at predicting the future than a dart-throwing chimpanzee.”
Most analysts could have significantly improved the accuracy of their predictions by making random guesses. No kidding.
Only a small number of experts were consistently good. They didn’t have a “know it all” attitude. They were open to new ideas, information, and data — including the ones that challenged their core assumptions and beliefs.
Tetlok found that the least reliable experts were the ones with the most knowledge and experience. Even after data showed that they were wrong, they would refuse to admit it.
They were overconfident. They shut out any evidence that contradicted their prediction. But they were open to ideas and evidence that matched their own beliefs. They were extremely slow in adapting to change. As a direct consequence, most of their predictions turned out to be inaccurate.
How to get better at decision making
What does a good decision mean? Does it mean a decision that leads to the expected outcome? No. We are still dealing with probabilities, uncertainties, past experiences, limited data, and our own biases.
A good decision isn’t determined by the outcome, though it does increase the likelihood of the desired outcome.
A good decision is the one that a sensible, logical, and informed person would make in the given circumstances.
Some famous business leaders and entrepreneurs have a straightforward method — Say no to everything you can’t say Hell yeah to. But it works only in limited situations. For instance, when you have to decide between yes and no.
We live in a dynamic world. We make complex decisions every day…the kind of decisions that require a deeper brainstorming. Here are a few ways to help you get better at decision making.
1. Is it reversible or irreversible?
This is one of the most popular tools in Amazon.com founder Jeff Bezos’s toolbox. He asks himself, “Is this a reversible or irreversible decision?”
If it’s reversible, we can make it quickly and without having tons of data. We don’t have to spend much time on decision-making.
Bezos used the same technique to decide whether to quit his high-paying job to launch Amazon. He figured that even if Amazon bombed, he could return to his previous job or get another job. He would learn some valuable lessons in the process. It was a reversible decision.
We don’t have to be perfect here. In a fast moving world, it’s a competitive advantage to be able to make most decisions quickly.
If you take too long to make a reversible decision, you could miss out a huge opportunity or your competitors could jump ahead of you.
When the decision is irreversible, we need to devote plenty of time to understand the problem more thoroughly.
Bezos describes irreversible decisions as one-way doors. If you walk through and don’t like what you see on the other side, you can’t go back to where you were before. In contrast, the reversible decisions are like two-way doors.
Bezos wrote in a shareholder letter, “These (irreversible) decisions must be made methodically, carefully, slowly, with great deliberation and consultation.”
2. Have a beginner’s mind
Phillip Tetlok found in his two-decade long study that most experts have a terrible track record at predicting things. Most of them were wrong because they had an expert’s mind and they were overconfident about it.
The small number of experts that were relatively better at predicting future trends and events were open to new ideas, arguments, and possibilities. They didn’t carry the burden of their past preconceptions. They were aware that they were dealing with a dynamic environment, where most of the things are uncertain.
There is a concept in Buddhism called the ‘Beginner’s Mind.’ It says we should approach things and ideas just like a beginner. Without being burdened by our past preconceptions. Something like thinking through first principles.
A streak of past successes minimizes the incentive to explore new ideas, especially when it contradicts the strategy that has worked well for us in the past. It restricts us from accepting feedback and new ideas and staying at the cutting edge of innovation.
3. Look at the expected value
Whether you are a Fortune 500 CEO or a rickshaw-puller, we all weigh odds and probabilities when making a decision. We look at what psychologists call the “Expected Value.”
We weigh the expected value of a positive outcome against the expected value of a negative outcome. It tells us which risks are worth taking, which project is worth pursuing, and when to quit something.
When we watch movies on a Friday night, we know that the expected value of the late night binge watching is higher than whatever we were going to do on Saturday morning.
When we decide not to stay up late on a Tuesday night because there is an important meeting on Wednesday morning, we’ve subconsciously decided that the expected value of the Wednesday morning meeting is higher than binge-watching our favorite show on late Tuesday night.
We don’t need to use complex mathematical formulae to determine the expected value of something. We do it subconsciously most of the time.
But most of us fail to recognize the expected value sometimes.
When we flip a coin and we get ‘tails’ three times straight, we think there is a ‘high likelihood’ of getting a ‘heads’ the fourth time. We forget that the expected value of heads vs tails in each coin flip is 50:50.
We are not going to get ‘heads’ because we got ‘tails’ the last three times. Each coin flip is independent.
We don’t control a random event like this one. If we keep flipping coins a hundred times or more, the heads vs tails ratio would be closer to 50:50. But in any one given flip, we don’t know what the outcome would be.
4. Focus on ‘not losing’ instead of ‘winning’
Sometimes we win not because we did everything to win, but because the other person/organization made a mistake and lost.
Remember the story of the hare and the tortoise? The tortoise won the race not because it ran faster but because the hare made the mistake of taking a nap after gaining a healthy lead. The hare got arrogant.
Charles Ellis says in his brilliant book Winning the Loser’s Game that in a “winner’s game,” the outcome depends on the correct actions of the winner. But in a “loser’s game,” the outcome is determined by the mistakes of the loser. It happens in cricket all the time.
A lot of things we do in life are what Ellis would describe as a “loser’s game”. Investing is one of them. Active fund managers have tried to outperform the market and most of them haven’t succeeded. They are trying to win.
But an investor who focuses on “not losing” chooses to invest in low-cost index funds. In the long run, the index investor will never outperform the index. But he will certainly outperform most of the active fund managers. He would win by not losing.
5. Create a weighted pros-cons list
Most of us use the pros-cons list to make rational decisions. Simply listing the pros on one side and cons on another side of a page gives us insights into what we should do in a given situation.
Canadian billionaire Seymour Schulich has further refined the pros-cons list in his book Get Smarter: Life and Business Lessons. Schulich has used it to make some of the most important business decisions of his life.
Here’s how it works. Take two sheets of papers. On one sheet, list all the pros and give each of them a score of zero to ten. Ten being the highest score.
On the second sheet, list all the negative things and assign them a score of zero to ten. In this list, a score of ten means the biggest drawback.
The score you assign to each pro and con depends on the relative importance of the point.
Add up the scores of pros and cons. If the score of positives is at least 2x the negative score, you should do it.
But if the positive score is less than twice the negative score, you need to think again about it…or maybe you shouldn’t do it.
It’s simple, but effective. Seymour Schulich and his executive team at Franco-Nevada collectively created a weighted pros-cons list to decide whether Franco-Nevada should be sold to Newmont Mining. The pros far weighted the cons. Schulich sold the company.
6. Disprove yourself
This is one of the most effective ways to consistently make good decisions.
It’s common for people to disprove their thesis, decision-making process, or something else after the outcome is known.
But it take a lot of courage, discipline, and self-awareness to ruthlessly challenge and disprove your own assumptions before making a decision.
When you face a decision, explore ideas and possibilities that contradict your existing beliefs and assumptions. It will drive you to look at things from a variety of perspectives, and minimize the chances of bad decisions.
Something similar happens in the scientific community. A scientist submits her research to a publication and researchers from all over the world scrutinize it. They will point out all the loopholes and flaws in her assumptions, methodology, etc. The broader scientific community tries to disprove her research. If it stands the test of peer review, it has a chance of being widely accepted.
7. Long-term perspective vs short-term perspective
Author Brian Tracy says in his book Get Smart: How to Think and Act Like the Most Successful and Highest-Paid People in Every Field that we should make decisions with a long-term perspective.
Harvard researcher Dr. Edward Banfield studied the upward economic mobility for about five decades to find out why some people moved up from lower socio-economic classes to a higher one, and some didn’t. Banfield says in his book The Unheavenly City that time perspective was the biggest factor.
People who remain at the lower socio-economic level have a time perspective of only a few hours or days.
Those who rise to the highest socio-economic level think in terms of years, decades, and even generations. The really successful people pay special attention to the long-term future.
If you change your time perspective from short-term to long-term, it will dramatically improve the quality of your decisions, even when you are making short-term decisions.
8. Think slow
Constantly reacting to the unfolding events without giving them a deep thought is the perfect recipe for mediocrity. But we are constantly reacting to things around us without any deliberate thought.
Brian Tracy writes that we start “reacting and responding to stimuli from environment” right from the “first ring of the alarm clock.”
Our behavior of quickly responding to a stimulus leaves little time for deliberate thought.
Giving yourself some time to think before you respond would prompt you to make a deliberate and rational decision. It also makes you think twice if you are responding in anger or frustration.
Slow thinking is not the best choice in every situation. The quick reaction to stimuli has its own perks. It saves us time and mental energy. But it’s worth asking yourself, “Does it require slow or fast thinking?”
Offer the right incentives and you can get almost anyone to do almost anything. Billionaire Charlie Munger once said, “Never, ever, think about something else when you should be thinking about the power of incentives.”
Most people respond to incentives. So, incentives can also help us understand the environment in which we are operating and making decisions.
For instance, when the sugar prices rise, the sugar mills have an incentive to sell the sugar they have been hoarding for months. They will even ramp up production if possible. At the same time, consumers will try to cut the consumption due to the rising costs.
When the prices have skyrocketed, the buyer has an incentive to buy less. But the seller has a strong incentive to sell more.
10. Trust your instincts
The rules and processes can help you make good decisions, especially when dealing with a complex system. But you shouldn’t underestimate your own instincts.
German psychologist Gerd Gigerenzer writes in his book Risk Savvy: How to Make Good Decisions that our intuition is often superior. It’s not exposed to sampling error.
Economist Harry Markowitz won the Noble Prize in 1990 for his work on Modern Portfolio Theory. He figured out a way to have an “optimal” mix of assets in an investment portfolio. But he didn’t follow his Nobel-winning theory in his own investments.
Instead, Harry Markowitz used a 1/N method, allocating his money equally across the N number of assets. Why didn’t he follow his own Nobel-winning theory? Because his intuition told him something different. Your intuition backed by introspection and data could lead to a good decision.
Harry Markowitz found that his Nobel-winning model will not perform better than the 1/N strategy unless it had at least 500 years to compete. I have never heard of a human staying invested for 500 years!
Markowitz chose the strategy that worked for him, not the one that won him the Nobel Prize.
As a side note, it also teaches us that we should do what works for us in real life, not what looks good in theory.
“A good plan, violently executed now, is better than a perfect plan next week.”
— General George Patton
There is no guarantee that you’ll make the right decisions every single time. But I hope this guide will help you minimize the number of terrible decisions.
With time and experience, we learn to view the past bad decisions as information and experience that helps us make better decisions in the future. We shouldn’t be too hard on ourselves if a decision leads to a bad outcome.
God! Too much of rambling. I need to stop now.
Signing off. But do subscribe to my newsletter.
Insights on investing, decision making, and critical thinking.
Once a month I share insights that will help you become a better investor and decision maker. I also occasionally do an email-only AMA session where I answer your questions.
I assume you are not a millionaire. Neither am I. So here we are — two middle-class people discussing why middle-class people never get wealthy.
“So, what would you have me do?” “Nothing. Sometimes nothing is the hardest thing to do.”
Nobody can be certain about the future. We are at best dealing with odds and probabilities, which will not always be in our favor. We cannot fully avoid risk and regrets.