Making Quality Decisions in an Uncertain World with a Brain that Craves Certainty is a Challenge.
Decisions and the principles of decision-making are never taught to us at home, school, or college. But where we are now is the result of a series of decisions we have made in the past, and where we will be in the future is determined by the decisions we make today. These decisions could be on life, career, relationships, raising children, or investing money.
We don’t need to make a lot of decisions to achieve our goals. We only need to make a few quality decisions. A few quality decisions are far better than several mediocre decisions. Setting a limit on the number of decisions we make in a year can bring seriousness to decision-making.
Being aware that we can make only a few decisions, we put extra effort into the decision-making process. We want those few decisions to be of the highest quality. There is ample time to make decisions if we plan to make only a few, high-quality decisions a year.
Decision Quality
It is the quality of our decisions that determines whether we move towards and achieve our goals or not. In investing, we need to make quality decisions to achieve superior investment returns.
If we equate the quality of a decision to its outcome, then that means any decision that gave a positive outcome is considered a good decision, and a decision that resulted in a negative outcome is considered a bad decision.
But, in life and investing, as we operate in a world with lots of uncertainty, both skill and luck can influence the outcome of the decision. We can make a well-thought-out decision and yet get a bad outcome just because of bad luck. And, similarly, we can make an unreflective, impulsive decision and have a good outcome just by being lucky.
Thus, equating the quality of a decision to the quality of its outcome is a mistake. The quality of a decision should be determined by the quality of the decision-making process. This post discusses six aspects of a good decision-making process – deliberative thinking, hidden information, luck, belief accuracy, emotional discipline, and timing.
How Our Brain Works
It is a widely accepted concept that the brain has two sides, each performing in widely different ways. Some call it ‘System 1’ and ‘System 2’, others the ‘reflexive’ and the ‘deliberative’ systems, and some call it the ‘emotional’ and the ‘rational’ brains. For the sake of our discussion, we select the second nomenclature – the ‘reflexive’ system and the ‘deliberative’ system.
The ’reflexive’ system is fast, automatic, unconscious, and unreflective whereas the ‘deliberative’ system is slow and deliberative. The reflexive system works unconsciously: we reflect on its actions only later. The reflexive system involves instincts, impulses, and intuition, while the deliberative system involves reason, logic, and contemplation. The ‘deliberative’ system collects information, makes sense of it, and consciously makes calculated rational decisions.
We can’t use our deliberative system in instances like, say, a cat jumping in front of our car. We need to decide and act instantly (apply brakes) in such situations. The cat would already be run over if we wait for our deliberative system to suggest an appropriate course of action. But for big decisions in life and investing, the deliberative system is optimal as it is less prone to error and a better steward for decision-making.
The human brain evolved over millions of years, and it is not possible to change how it works. What is possible is to develop an accurate understanding of how it works and operate within its limitations to achieve our goals.
What We Don’t Know
There are many pitfalls and traps to watch out for while making decisions, even if we can bring our deliberative thinking into the decision-making process. The usual way of deliberative thinking is to collect information about the situation in which decisions must be made, then process that information, and finally arrive at a decision based on the insight we derived from the information processing. The information we collect to process is: ‘what we know.’ But what about ‘what we don’t know’: the hidden information that can have a significant influence on the decision outcome?
How to deal with ‘what we don’t know’?
One method is being aware that the information available to us is not the complete set of information on the subject, and once we possess that awareness, we won’t see the future as one, exact inevitable outcome, but as a set of possible, uncertain outcomes. And the best we can do as decision-makers is to make the best guess of the chances for these different possible outcomes to happen.
We no longer focus on how sure we are, but instead on how unsure we are. We don’t do black-and-white thinking anymore. There are no ‘right’ or ‘wrong’ decisions. Now, everything is in between; the grey area. The terms suitable for an uncertain world – probably, unlikely, less likely, highly unlikely, less probable, possible but highly improbable – are used more often now. We start thinking in probabilities.
Getting ourselves comfortable with the fact that the world is uncertain and unpredictable is necessary for good decision-making.
Skill Vs Luck
In life and investing, both skill and luck are involved in decision making and it is difficult to determine precisely how much skill and how much luck were involved in the outcome of a decision. The complete elimination of luck is impossible.
Luck means the success or failure of a decision happened due to chance rather than through one’s actions. The outcome of our decisions largely depends on what happens in the future. The world is an uncertain place, and the future most of the time unfolds in unpredictable ways, influenced by many factors outside our control.
In investing, a stock’s prospective return depends on its future business and financial performance. Many factors outside of anyone’s control can influence them, like, the global economic prospects, inflation dynamics, geo-political tensions, trade policies, and fiscal and monetary policies in major economies. These factors are out of anyone’s control, and they are unpredictable.
Trying to predict all these factors and getting it right, even once, is an impossible task. An effective approach would be to get comfortable with uncertainty and then account for that uncertainty in our decision-making. By accepting uncertainty, we are also, at the same time, acknowledging luck’s role in decision outcomes.
Our natural inclination is to attribute our skill to our positive decision outcomes and bad luck to our negative decision outcomes. But it is a wrong attitude. Both positive and negative outcomes could happen just by chance (luck) since we make decisions in an uncertain, unpredictable world.
It is hard to differentiate whether luck or skill was responsible for our decision outcomes. The best we could do is to evaluate both the decision-making process and the decision outcome rationally. Taking feedback is an important step in an effective decision-making process. There are valuable lessons to be learned from every decision we make and its results.
Once we are comfortable with uncertainty and luck, we will no more be too hard on ourselves when things don’t work out as expected.
I still make that mistake: being hard on myself when things don’t work out. When a stock in my portfolio underperforms or gives a negative return, I overthink and overanalyse to determine the reason why the idea failed to perform, and I do it because of my unwillingness to accept that it could be just bad luck. A shift in the competitive landscape for the stock’s industry and the resultant change in investor perception towards the stock – both factors outside our control – could be responsible for the poor results.
Being open-minded and accepting the role of chance in decision outcomes helps to let go of bad experiences like these and move on. It also makes us better decision-makers.
Belief Accuracy
We take decisions based on our beliefs: about ourselves and the world. The quality of our decisions depends on how accurately our beliefs represent the real world. The more accurate our beliefs are, the better our decisions.
The usual method of deliberative thinking is to collect information, process that information to gain insights, and then base our decisions and actions on the insights gained. But how we process the information is based on our beliefs. Once a belief is formed, it is hard to change it. So, we need to be extra careful how we form beliefs on anything.
The correct approach to form a belief is: we hear or know something, think about it, vet it with evidence, and when convinced it to be true, only then, should we form the belief. But this is not our natural tendency. Our natural tendency is to believe whatever we hear or read as true, without thinking or vetting.
And a much bigger problem is that when new information that contradicts or disapproves of our belief (formed haphazardly) appears, rather than changing or updating our belief, we interpret the new information in a way that conforms to our belief. We change what the information means rather than changing our beliefs.
To be an effective decision-maker, it is imperative to be prudential in belief-forming and engage in belief updating based on new information so that our beliefs more accurately reflect the truth.
Emotional Discipline
Decisions made based on emotions are considered low-quality decisions. Fear, greed, enthusiasm, hope, despair, and anxiety are major emotions an investor will encounter in decision-making.
Emotions generate a desire for impulsive actions. Impulses aim for immediate gratification without any concern for future consequences. The ability to resist impulses when overwhelmed by emotions is an essential skill for effective decision-making. Self-control, willpower, and the ability to delay gratification are the qualities that enable the decision-maker to resist impulses. We can call it emotional discipline.
Self-awareness is the first step towards emotional discipline. It is the ability to recognize and label emotions as they happen within us. Once recognized and labelled, the next step in emotional discipline is dealing with the emotion: reducing its energy or positively redirecting the energy and motivating ourselves towards our goals.
There are two sides to our brain – the emotional side and the rational side. We can use the rational side of the brain to neutralize emotions. But the problem is that our emotional part is almost three times stronger than the thinking or rational part. So, once overwhelmed by emotions, our rational side is incapacitated.
This is where self-control, willpower, and the ability to delay gratification come in handy.
Timing Matters
Does ‘when’ we make the decision matter? It does. Scientific studies prove that we humans and other living things have internal clocks, and as a result, our performance follows a consistent pattern over our waking hours.
Our performance oscillates during the day. Our moods and cognitive abilities rise during the morning, peak by noon, makes a steep fall to a trough during the afternoon, and then make a recovery by early evening. The experts behind the finding advise that the best time for our tasks is determined by the nature of the task.
Mornings – the peak performance period – are suitable for analytical works that require deep focus and clear thinking. Afternoons are the ‘trough’ period: our moods plummet and hit a bottom during this period. These are dangerous times, and we should avoid scheduling important tasks during this period. We can secure ourselves from its pitfalls by restricting only mundane tasks to this period.
The ‘recovery’ phase starts during the early evening hours and is suitable for tasks that require us to be less self-conscious and operate in a relaxed and natural way. The ‘recovery’ period is most productive for tasks that require us to be creative and innovative. Tasks like writing, generating product or marketing ideas, and other creative works could be scheduled for this period.
So, as this post is concerned with decision-making, when is the appropriate time for decision-making?
I believe mornings, when we are at the peak of our performance, are suitable for decision-making. Our mind is clear, sharp, and more focused in the mornings. We can utilize evenings to write or generate ideas, but vetting the ideas, and deciding which one to implement should be done in the mornings.
Conclusion
We need to make quality investment decisions if we want to build wealth. We need to make quality parenting decisions if we want our children to become healthy, independent, and compassionate individuals. For a meaningful, satisfying career, we need to make quality career decisions.
Decisions are everywhere and they are important in life’s progress. The choices our present-self makes today determine whether we will have a better, progressive future-self. Decision-making is not an easy task, particularly in a world with lots of uncertainty. Being aware of these six aspects and their influence on our decision quality can, to a certain extent, help us improve our decision-making skills or at least avoid some of its pitfalls.
AMN CAPITAL 
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