Decision making, hindsight-bias and analysis paralysis

When I first went self-employed, some eight and a half years ago now, one of the pitfalls I hadn’t planned for was how to make effective decisions.

In the past, I’d always had bosses. Not that many of them were that great, which was part of the reason to strike out on my own. Bosses should be the easy way to improve, they should be able to take a view of you and the problem you’re looking to solve. They should be able to help you with your decision process as well as your judgement. However, this is actually quite hard and subjective and requires people to do a lot of thinking and have a decent amount of empathy. Therefore most of my managers over time defaulted to resulting. By this I mean they took the view that good outcomes are the result of good behaviours and decisions, and bad outcomes are therefore the result of bad decisions. So there was a fault in the system that prevented an improvement in the ability to make good decisions.

And decision making is remarkably important. By and large, our successes are the results of the actions and decisions we have made over time. But how do we get better at making decisions? Particularly in avoiding our inherent biases (we all have these, there’s no escaping them).

Without a boss to oversee your work, self-employment makes decision making even harder. When I first started as self-employed, suddenly the range of options were so broad, and so varied, it was difficult to make a decision, and I could find myself stuck in ‘analysis paralysis’, doing plenty of research but not moving forward.

Fortunately, an economist provided me with some help in the face of having a poor boss or no boss to guide you at all.

Daniel Kahneman, economics Nobel laureate, and all-round expert on biases, says a decision journal is the best solution. You can use this to take the matter into your own hands, whether you have a boss, you’re on your own or work in a partnership or use a business coach. Kahneman says that the way to test the quality of your decisions is to test the process by which you make them.

Kahneman said ‘buy a cheap notebook and start keeping track of your decisions. And the specific idea is whenever you’re making a consequential decision, just take a moment to think, write down what you expect to happen, why you expect it to happen and then actually, and this is optional, but probably a great idea, is write down how you feel about the situation, both physically and even emotionally. Just, how do you feel? I feel tired. I feel good, or this is really draining me. Whatever you think. The key to doing this is that it prevents something called hindsight bias, which is no matter what happens in the world, we tend to look back on our decision-making process, and we tilt it in a way that looks more favourable to us, right? So we have a bias to explain what has happened.’

Keeping a journal helps with accurate and honest feedback on what you were thinking when you made a decision. What I mean by this, is you can see when you were stupid and lucky, as well as when you were smart but unlucky. And over time this will give you the feedback you need to help you make better decisions.

The key to understanding the limits of our knowledge (see Warren Buffett’s Circle of Competence for more tips on this) is to check the results of our decisions against what we thought was going to happen and why we thought that would happen. That sort of feedback loop is very powerful, and our minds aren’t able to provide that without this kind of help being in place.

Research into biases shows clearly that we don’t know as much as we think we know. None of us. We all suffer, to an extent, from the Dunning-Kruger Effect. We fool ourselves into thinking we understand something when we actually don’t, and we have no means to correct ourselves.

We all have a bias where our minds revise history to preserve our view of ourselves. To keep on an even keel, we tell ourselves stories and that conflates the cause and effect of a decision we made, be it in business or in our wider lives. The best cure for this is the decision journal.

You can consider the decision journal a form of quality control. Using the journal is easy, but implementing it and maintaining it requires both discipline and humility. Which are two very good traits to cultivate.

The act of writing something down in itself can be a kind of magic. As Carol Loomis said:

‘Writing itself makes you realize where there are holes in things. I’m never sure what I think until I see what I write. And so I believe that, even though you’re an optimist, the analysis part of you kicks in when you sit down [to write] … You think, “Oh, that can’t be right.” And you have to go back, and you have to rethink it all.’

So- whenever you’re making a consequential decision, either individually or as part of a group, you take a moment and write down:

  1. The situation or context
  2. The problem statement or frame
  3. The variables that govern the situation
  4. The complications or complexity as you see it
  5. Alternatives that were seriously considered and why they were not chosen (think: the work required to have an opinion)
  6. A paragraph explaining the range of outcomes
  7. A paragraph explaining what you expect to happen and the reasoning and actual probabilities you assign to each projected outcome (The degree of confidence matters, a lot.)
  8. The time of day you’re making the decision and how you feel physically and mentally (If you’re tired, for example, write it down.)

You have to make this part your own, and experiment a bit to find out what works. An example below:-

  • What is the expected outcome(s)
  • What are the second and third order consequences
  • What is the worst-case scenario and why that’s ok
  • What is the potential upside beyond core thesis
  • What emotions am I experiencing
  • What is the opportunity cost (by doing this what am I not doing)
  • What unique advantages or insights do I have in this situation
  • Who is the best person to make this decision

Journals can be tailored to the situation and context. Specific decisions might include trade-offs, second-order effects, weighting criteria, or other relevant factors. These examples are only to get you started. Often first thoughts represent the thinking of someone else and not our own thinking. Sometimes, small effects can cause disproportionate responses whereas bigger ones might have no impact. Remember that causality is complex, especially in complex domains.

There are two common ways people wriggle out of their own decisions: hindsight bias and jargon. We live in an age of computers, but you must do this journaling by hand because that will help reduce the odds of hindsight bias. It’s easy to look at a printout and say, “I didn’t see it that way.” It’s a lot harder to look at your own writing and say the same thing. Another thing to avoid is vague and ambiguous wording. If you’re talking in abstractions, you’re not ready to make a decision, and you’ll find it easy to change the definitions to suit new information.

Your decision journal should be reviewed on a regular basis. The review is an important part of the process. This is where you can get better. Realising where you make mistakes will help you make better decisions if you’re rational enough. This is also where a coach can help. If you share your journal with someone, they can review it with you and help identify areas for improvement.

Odds are you’re going to discover two things right away. First, you’re right a lot of the time. Second, it’s often for the wrong reasons. This discovery can be somewhat humbling. It’s also how we learn.

James Tarry
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James Tarry

James is Northamptonshire's Scottsdale representative. He combines the art of developing goals and aspirations with the science of identifying the best solutions. He looks to help gain clarity of where you are now, where you want to get to & how you want the landscape to look on the journey. Financial Planning helps you understand how you can achieve your objectives and identify what changes need to happen to get you there.