Decisions, Decisions, Decisions (Part 4)

What’s the best way to decide?

Photo: Judith Broug. Source: Morguefile

We’re deciding things all the time. What time to get up, what courses to take, who to hire and fire, whether to fix up the house or sell it. Our decisions depend on our thinking. And the clearer our thoughts, the better our decisions will be.

The final step in making good decisions is putting the relevant facts in place. Facts are real. They can’t be argued over or debated. Facts may support a course of action or not, you may choose to heed them or not, but they’re part of the landscape. They stand out in a sea of opinions and feelings. If you’re re-doing a kitchen, what will your materials cost? If you’re looking at a stock, what was the company’s financial performance last year?

But don’t just look for facts that go along with the way you were leaning before. Your brain will do that already – it’s called “confirmation bias.” We naturally seek out information that confirms our prior assumptions. Look for ways to disprove your hypothesis. That’s how science advances: one disproved hypothesis at a time.

Hardtop or convertible Ford Model A? Source: Carpictures.cc

One way to do this is through a technique known as “inversion.” Assume the opposite of what you think might be the case, then look for data that proves or disproves that assumption. 100 years ago, Henry Ford decided to double his workers’ wages. In My Forty Years With Ford, his CFO Charles Sorensen described Ford’s concern with the falling share of company revenues going to labor. He didn’t see how current trends could continue, and expected labor problems – as had happened in other industries. He came up with a revolutionary solution: the $5 workday – twice what the average factory worker made at the time. Doubling wages stabilized his workforce and caused productivity in the company to surge.

If you look for facts contrary to your assumptions and you find them, though, there’s a technical term for that. It means your assumption is wrong. If you look for flaws in your plans and you find them, you have to work through the problems. Ask yourself: what could go wrong? Then make your plans – or revise them.

AB test example. Illustration: Maxime Lorant. Source: Wikipedia

Data driven decisions are typically more effective than those we make by intuition or “from our gut.” By gathering facts and testing them, we’re much more likely to make the right choices. And in knowledge industries like investments, medicine, and law, our decisions are our product. Good decision making is our quality control.

Douglas R. Tengdin, CFA

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