Tag Archives: decision-making

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

Decisions, Decisions, Decisions (Part 3)

What resources do we need to improve our decisions?

Source: usafacts

We all use facts to make our decisions. We also act on what we know – of ourselves and of the situation. We can look into a problem and we can seek help. Where we look and who we turn to are both resources.

Encyclopedic resources are straightforward and easily accessible. They present humanity’s collective knowledge about a subject. They might answer a question like what symptoms are linked to a disease or the financial performance of a company at the end of a quarter. You might conclude that you have the disease or that you should buy that stock, but the resource itself cannot tell you that.

For confirmation, we turn to a personal resource, someone we trust to use encyclopedic knowledge to help us out. Personal resources also provide support, whether it’s your doctor working with you on a treatment or an organization that sends someone to sit with you while you are alone.

The rise of the internet and the explosion of resources has altered the landscape of decision making. There are so many resources now that we have changed the way we interact with them. Americans used to say they got their information through a specific method: television, newspaper, radio, internet. Now, they are more likely to name a specific source which is accessed across multiple methods: The New York Times, Fox News, Buzzfeed. The pendulum has swung from gathering information to trusting the source to tell you what you need to know.

To be fair, the element of trust has always played a role in using resources. Whether it’s a person, book, or organization, at the end of the day we trust to some extent what is presented before us. We trust that our doctor’s education was rigorous and that they keep up with developments. We trust that the stock quotes reflect the actions in the market that day.

But as Mrs. Weasley admonishes her daughter at the end of Harry Potter and the Chamber of Secrets, “never trust anything that can think for itself if you can’t see where it keeps its brain.” The same can be said of anything with a collective brain.

Veronica Peterson

Decisions, Decisions, Decisions (Part 2)

How can we improve our decision-making?

Source: Quora

Most of us live in “react-mode.” We’re like thermostats – the temperature goes up, and we try to cool things down. It gets a little chilly, and we turn up the heat. We don’t deliberate, we just do something because it makes us feel better. But reacting to circumstances doesn’t change the underlying situation. It just makes us a little more comfortable, for a little while.

One of the best ways to improve our decisions is to slow down. Think about the underlying dynamics of what’s going on. In Thinking Fast and Slow Nobel prize-winner Danny Kahnemann posits that our brains use two cognitive systems. System 1 thinking is fast, intuitive, and emotional. System 2 thinking is slow, deliberative, and logical. System 1 thinking is important for survival. When three deer jump onto the highway 50 feet in front of you, you don’t have much time to figure out what to do. You step on the brakes!

Photo: M Prinke. Source: Animalphotos.info

But usually we have time to pause and reflect. Not all decisions need patient deliberation, but a lot do. Buying deodorant doesn’t require much planning. But buying a pet does: pets are effectively family members, requiring care and attention. A new puppy or kitten can change many aspects of your life – how you travel when you get home, what kind of vehicle you need. The long-term effects can be profound.

So think about the consequences. It may be emotionally satisfying to yell at someone who cuts you off in traffic, but it’s a good idea to close your windows, first. Successful people and organizations don’t react, they act. They pause and think before they take action. The process of stopping and thinking almost always improves the quality of our responses. United Airlines CEO Oscar Munoz probably wishes he had reflected a little more before writing that first email.

Lord Acton once said that if it is not necessary to decide, then it is necessary not to decide. And if the decision can’t wait, you can at least count to ten.

Douglas R. Tengdin, CFA

Decisions, Decisions, Decisions (Part 1)

How can we make better choices?

Photo: Colin. Source: Wikipedia

Let’s face it: the world is constantly changing, and we face important decisions every day – where to live, what to do, how to show our friends and family that we care. We’ve never been so interconnected, and yet people have never felt so isolated. It’s never been easier to find out who organized the Seneca Falls Convention on women’s rights in 1848 or why the British keep ravens in the Tower of London. But it’s never been harder to order our lives so that the most important things stay on the top of the pile.

But most of us slip into a comfort zone when it comes to making decisions. We fall into familiar patterns and jump to simple conclusions. This is especially important when it comes to investing. We think: “This is a good company. I should buy the stock,” when we ought to consider other factors, and perhaps think, “This is a good company, but everyone else thinks so, too. I don’t think it will be as profitable or grow as quickly as everyone else does, so I should sell the stock.” When we invest, we need to consider both fundamentals and prices.

One critical way to make better decisions is to look at the longer-term effects of what we do and say. At the extremes, a hopeless drug addict will only try to figure out where they can get their next hit. But folks who are second or third-generation wealthy are often intensely future-oriented. They have a perspective that looks decades or even generations forward. There are layers of second and third-order effects that flow from our choices. We can never really do just one thing.

We can’t envision every bounce of the billiard ball across the table, but we need to try. Obviously, some decisions are more important than others. But – like the lion who spared a mouse who later freed him from a snare – sometimes a small kindness can have can have big consequences down the road.

Photo: Charles Hutchins. Source: Wikimedia

This isn’t easy. But as Charlie Munger once said, it’s not supposed to be easy. Anyone who thinks it’s easy … isn’t thinking.

Douglas R. Tengdin, CFA

Too Much, Too Many

Do we have too many choices?

Photo: Aimee Low. Source: Morguefile

When we face a shelf with dozens of varieties of meat, it’s hard to decide what to buy. It’s much easier when just need to choose from a few. Academics call this “choice overload.” Walk into a drug store and look at the selection of shampoo: it’s overwhelming. Choice overload can hit kids when they’re deciding which college to attend or what to major in.

And it applies to investing. When company 401(k) plans have over a dozen investment funds, fewer people sign up than when they only have two or three. Also, the more choices folks have, the more likely they are to put their money in cash. When we face too many options, we procrastinate and then act impulsively, often against our own long-term interest.

One way to overcome choice overload is to narrow things down, to look at categories rather than individual items. Also, it helps if we work into the process gradually. Anyone who has bought a new computer or new car knows that there are a dizzying number ways to customize the purchase. If we start with basic options and move into more complex areas, we’re more likely to stay engaged.

Just don’t get discouraged just because there are so many alternatives. In many ways, this is a golden age for investors. We can get broadly diversified, global portfolios with the click of a mouse. But it’s critical to get going. Because when it comes to investing, the worst choice to make is never to start.

Douglas R. Tengdin, CFA

Chief Investment Officer

When Being Right is Wrong

Are we addicted to being right?

Research shows that when we get into stressful discussions, our hormones kick in. Cortisol hits the body, and we default to a fight-or-flight response. If we stay engaged, our voices might get louder. We begin to talk over each other; our pulse and blood pressure rise. It feels like an out-of-body experience.

If others back down, our brains are flooded with adrenaline and dopamine. We feel dominant and invincible. It’s a feeling we like, and it becomes physically addictive. The next time the tension rises, we fight again. And again. We want to get that buzz.

But this power trip can be poisonous. Investing, like many things in life, is a team sport. After a decision, lots of players are part of making it work. If they’re just going along to get along, we won’t get the outcome we need.

Fortunately, there’s a team-building hormone as well: oxytocin. It comes into play when we create human connections, and it helps create interdependence and sharing. By trying to empathize and understand–rather than to dominate–we can build trust and make our decisions more effective.

Sometimes it’s wrong to be right. The best way to communicate just might be to listen.

Douglas R. Tengdin, CFA

Chief Investment Officer