EconomyFeb 21 2022

How to make the best decisions in the year ahead

  • Identify the pitfalls of decision making in relation to external stimuli.
  • Explain how human nature influences investment decisions.
  • Understand how to help investors navigate long-term investment planning.
  • Identify the pitfalls of decision making in relation to external stimuli.
  • Explain how human nature influences investment decisions.
  • Understand how to help investors navigate long-term investment planning.
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How to make the best decisions in the year ahead
Photo by Ylanite Koppens from Pexels

However, unlike the fluctuations of market prices, the risks posed by poor decision making and the impact of these decisions are less visible and therefore easier to ignore. In fact, we are often insulated from confronting the mistakes of the past by the fact that we tend to remember the decisions that turned out well and forget those that turned out poorly regardless of the underlying quality of those decisions.

Annie Duke refers to this as "resulting" in her excellent book Thinking In Bets. By judging the quality of the decisions we make by results of an activity that involves luck, such as short-term investment returns, we prevent ourselves from receiving the feedback that will help us improve. We not only make many mistakes, but we make the same mistakes continually. 

External stimuli

So, what can we do to avoid these mistakes?

Although these weaknesses in our decision-making process are intrinsic to us as human beings, they tend to be driven by external stimuli. It is the attempt to make consequential decisions in stressful situations that often causes us to stray. Such situations typically occur when we are subjected to uncomfortable information, such as news of a market crash or a social media influencer bragging about overnight fortunes. 

While this may seem like a modern phenomenon, Homer described a very similar scenario, and more importantly how to deal with it, in the Odyssey, written more than 2,500 years ago. Rather than the media, it was a group of sirens that provoked the poor decisions that led to disaster.

These mythical creatures had an incredible song that would cause sailors to wreck their ships as they attempted to sail past the sirens’ island home. As Odysseus and his crew had to pass the island on his long journey home to Ithaca from the Trojan war, engagement with the sirens and exposure to their song was unavoidable.

But Odysseus had been warned about the danger beforehand and so, rather than simply hoping that his crew and himself could ignore the song, Odysseus had his crew’s ears plugged with wax and himself tied to the mast. Consequently, his crew could not hear the song and he could not react to it and thus they passed safely. 

The first lesson we learn from this encounter is that it is inevitable that we and our clients will be exposed to the modern siren songs that accompany investment. We must prepare both ourselves and our clients for what is to come.

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