Was That A Good Decision?
It is human nature to seek answers to what comes next or what is likely to happen tomorrow, next quarter, next year and beyond. We search for insight so we may make “better” decisions about what to do and how to proceed on the “right” path going forward. The reality is no one knows what will happen next and what surprises maybe lurking. Still, we must, in the face the unknowable future, make decisions and boldly go forth.
Consider for a moment decision making itself. Not all decisions matter. A vast number of decisions, like where to grab a coffee or which pair of socks to wear, are mostly unimportant. The consequences of such decisions do not matter all that much. But some decisions are monumental, like where to live, who to trust, or what to do in the face of economic uncertainty. Lucky for us, it is possible to develop skills that help in becoming a better decision maker.
When was the last time you thought about how you decide and/or evaluated if you are any good at decision making? If you are like most people, you have never been explicitly taught how to make effective decisions. Also, unless you have studied decision making, it is likely you unwittingly fall victim to the resulting fallacy. Simply stated, the resulting fallacy, is the error caused when judging a decision based solely on the outcome. If the outcome was good, then the decision must have been good, and vice versa for bad outcomes, right? It is natural to form such an opinion when armed with the benefit of hindsight. However, it is possible to make a good decision and have a bad outcome or conversely to make a bad decision but have a good outcome.
Annie Duke, a top poker player and PhD in Language has written a book Thinking in Bets where she provides insight about how she rose to prominence in the world of professional poker. One of her main observations is this resulting fallacy where we create too tight a relationship between the quality of the outcome and the quality of the decision. According to Dr. Duke areas where skill is the primary determinant of outcome, results are tightly connected to decisions. However, in areas where randomness and luck play a role, decisions and outcomes are loosely connected.
Consider an example: Jack and Jill, an adoring couple have plans join friends across town for dinner at 6pm. The drive normally takes about 30 minutes, however, they are running late and left themselves only 25 minutes to get there. Jack suggests they take a new route, a shortcut, he recently learned from his coworker. He thinks it will shave about five to ten minutes off the drive and put them right on time. So, they take it. But, as luck would have it, there’s an accident and the traffic was backed up and they arrived 20 minutes late. Annoyed, Jill remarks, “That was a terrible decision, we should have just gone the normal route and we’d have hardly been late at all!” But imagine, if luck would have favored them, she would have been delighted and praised Jack’s decision. Was the short-cut a good idea or a bad one?
Dr. Duke also points out the obvious that the more complex the field in which you are making decisions the more knowledge and skill matter. Had Jack been more familiar with the “short cut” neighborhood, he may have been able to find his way around the accident. The more complex and chaotic an environment, the more expert intuition matters. In this short video, Nobel-Prize winning psychologist Daniel Kahneman discuss decision making and the role of expert intuition in decision making.
No where is it more important than in the domain of financial services to have experts on your team. Here at Lake Tahoe Wealth Management we regularly audit it our decision making with the intent of becoming better. This allows us to refine and hone our expert intuition. Contact us to learn more about it.
