Make Fewer Decisions

WARNING: The following is real security camera footage and it is truly horrible.

In August of 2010, while visiting a shopping center in Daejon, South Korea, a 40 year-old wheelchair-bound man identified only as Mr. Lee just missed an elevator when the doors closed on him a moment too soon (as shown above). Angered at his misfortune, Lee backed up his motorized chair and rammed into the elevator doors. Unsatisfied at merely denting the object of his rage, Lee backed up and acted as human battering ram again. He “succeeded” this time, crashing through the doors and plunging to his death. Not surprisingly, shopping center officials vowed to strengthen the doors of their elevators in order to protect future morons.

If you’re like most people, you probably aren’t sure whether it’s appropriate to laugh at Lee’s stupidity or simply to despair at the loss of life (as well as the depth and extent of human stupidity). While most are not as flagrant as this one, it isn’t hard to find myriad examples of poor decision-making among the ranks of humankind. We make many such mistakes ourselves, even though we may not remove ourselves from the gene pool for having done so.

Our tendency towards poor decisions is a subject I write about often, even if and as our ability to overcome the behavioral and cognitive foibles and biases that so readily beset us is more than a little limited. Proposed remedies (or at least ameliorators) include implementing better choice architecture (such as slowing down and avoiding distractions), building better processes (checklists, for example), and cultivating a support system willing, able and eager to point out one’s errors. But even when we recognize our inherent weaknesses as a species, we tend to think that we’re somehow immune individually and readily discount the advice of those who suggest that we might be wrong.

One powerful and often overlooked corrective to poor decision-making should be obvious – make fewer decisions. This isn’t some paean to procrastination, however. It’s simple math. Fewer decisions means fewer bad decisions (which is particularly significant in that eliminating mistakes is demonstrably more important to good investment outcomes than making good choices).

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How Advisors Can Make Better Decisions

Source: Research magazine

My latest Research magazine column, from the May 2014 issue, is now available on-line. Its focus is on what we financial advisors can do to improve our decision-making. Here’s a quick taste.

Dalbar’s latest conclusion suggests that individual investors shouldn’t be expected to help themselves. That reality provides advisors with a tremendous and important opportunity. But unless and until advisors improve their own decision-making skills, the opportunity will necessarily be squandered. There is simply no substitute for good judgment. But it remains in remarkably short supply.

I hope you’ll read it all and the entire issue as well.

How Advisors Can Make Better Decisions

Edited to add: Jason Zweig reminded me today that while all the relevant studies show that individuals underperform by a significant amount (we tend to buy high and sell low), Dalbar’s data (the study I reference in the piece) shows a gap that’s much larger than the other research. I should have noted that here. But it doesn’t change the primary point — our decision-making isn’t very good and needs to get much better. It just isn’t likely that it’s quite as bad as Dalbar portrays it.

There’s No Substitute for Good Judgment

Source: The Economist

“P.T. Barnum was right.”

So says Commander Lyle Tiberius Rourke in the Disney film Atlantis: The Lost Empire, referring to the famous expression attributed to the great American showman: “There’s a sucker born every minute.” Even though Barnum didn’t say it, we get it. In talking about the scientific method in his famous 1974 Cal Tech commencement address, Nobel laureate Richard Feynman emphasized the point: “The first principle is that you must not fool yourself – and you are the easiest person to fool.”

Accordingly, we’re right to be skeptical about our decision-making abilities in general because our beliefs, judgments and choices are so frequently wrong. That is to say that they are mathematically in error, logically flawed, inconsistent with objective reality, or some combination thereof, largely on account of our behavioral and cognitive biases. Our intuition is simply not to be trusted.

Part of the problem is (as it so often is) explained by Nobel laureate Daniel Kahneman: “A remarkable aspect of your mental life is that you are rarely stumped. … you often have [supposed] answers to questions that you do not completely understand, relying on evidence that you can neither explain nor defend.” We thus jump to conclusions quickly – far too quickly – and without a proper basis.

We aren’t stupid, of course (or at least entirely stupid). Yet even the smartest, most sophisticated and most perceptive among us make such mistakes and make them repeatedly and predictably. That predictability, together with our innate intelligence, offers at least some hope that we can do something meaningful to counteract the problems.

One appropriate response to our difficulties in this area is to create a carefully designed and data-driven investment process with fewer imbedded decisions. When decision-making is risky business, it makes sense to limit the number of decisions that need to be made. For example, it makes sense to use a variety of screens for sorting prospective investments and to make sure that such investments meet certain criteria before we put our money to work. An Investment Policy Statement outlining limits to investment and thereby limiting the number of decisions to be made and even further limiting the number of decisions to be made quickly is imperative.

It’s even tempting to try to create a fully “automated” system. However, the idea that we can (or should) weed-out human judgment entirely is silly. Choices about how to create one’s investment process must be made and somebody (or, better yet, a group of somebodies*) will have to make them. Moreover, a process built to be devoid of human judgment runs grave risks of its own.

Take the case of Adrionna Harris, a sixth grader in Virginia Beach, Virginia, for example.