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How To Make Better Decisions

Why Making Good Decisions is More Important Than Being Right

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No matter how smart you are, you will be wrong all the time!

When making decisions under uncertainty this is the only thing we know for sure.

And the further we get in life, the more weight our decisions tend to carry. At some point, we might have children or get into a leadership position. That’s when the impact of our decisions gets multiplied by the number of people that we affect.

Hence, the quality of our decisions will not just determine how our lives turn out. It will also shape the lives of others.

Leverage and the Value of Being Right

Microsoft’s CEO Satya Nadella earns ~$50 million a year.

This might make you want to shout:

The world is so unfair! Why does he get paid so much? And in many ways, you might be right!

The world is unfair.

However, he gets paid that much because that is what he is worth to Microsoft. I would argue that they actually struck a bargain and that he is probably worth even more to them. The reason for that is that he is right more often than others about what Microsoft should do.

So, they pay him this much for his superior judgment. And to Microsoft, that’s worth a lot! To see just how much, let’s do a thought experiment.

For the sake of argument, let’s say he is right 10% more often about what Microsoft should do than the next guy - or gal. Microsoft has an annual revenue of ~$228 billion. Let’s assume Satya Nadella’s good decision-making causes the company to earn 1% more revenue a year.

That means that his impact is $2.28 billion annually.

If he is just 10% better than the alternative, that 10% is worth $228 million a year.

Satya Nadella is obviously an incredibly smart human. He is very knowledgeable about the industry he is in. On top of that, he has probably more context about Microsoft than almost anyone else on the planet, because he has been at the company forever.

However, the incredible leverage his position provides him with puts unimaginable weight behind his decisions.

And many of these decisions will be made under uncertainty.

As a result, the outcomes will be subject to randomness. Even perfect decisions will not always yield the expected result. This randomness is why the quality of the decision-making process is actually more important than the outcome of a given decision.

But what makes a good decision?

Learning To Size Our Bets

Let’s look at Poker.

If you don’t know the rules of the game, don’t worry!

We’re not going to need them.

Just know: Every round, in Poker, more cards get shown. We need to decide how much money we are willing to pay, to stay in the game and see these cards.

Depending on the card that get shown, our position will improve or get worse.

Let’s assume we don’t have X-ray vision and can’t tell if our opponents are bluffing. How do we decide at scale how much effort (money) is appropriate to keep playing and when do we pass and wait until the game restarts?

In other words: How do we size our bets?

We need to calculate the so-called pot odds.

Here’s an example of what this means.

We see the cards in our hands and on the table. We know what cards are in a deck. This allows us to calculate the probabilities of a winning card to be shown next.

Let’s say that the chance of a winning card to be turned is one in twenty.

If we have to pay 10€ to see the next card, the payout of that decision should be at least 20 times what we paid to see the next card. In technical speak, this means our expected return is positive.

We obviously won’t win every time if we play that way.

However, if we play 1000 games, we will win on average. Given, that we don’t overextend ourselves and manage to keep playing for long enough.

The point is not that we should roll the dice!

Rather, we should factor in losing and strive to size our bets in proportion to the expected payouts. In business, and in Life.

But because outcomes are subject to randomness, we can just work on improving our decision-making process.

But how do we do that most effectively?

Making a Decision To Improve Our Process

Many things keep us from making good decisions.

Emotions. A lack of knowledge.

And as if that wasn’t enough there are about a dozen cognitive biases that we can rely on to throw us a curved ball whenever we need it the least.

Here are five tips to improve our decision-making process:

Pre-Mortem Analysis

List out all possible bad outcomes.

Then, work backward. Identify things that could lead to these outcomes. This interrupts our thought patterns and helps us to see risks that we otherwise would have overlooked.

Recording Assumptions

Hindsight Bias is a pesky beast!

It is also known as the “I-knew-it-all-along” phenomenon and describes our tendency to think we should have been able to predict a past event. This happens even if there was no way we could have known what was going to happen.

This can also become a significant source of overconfidence and cloud future decision-making.

If we write down our assumptions, it will help us to ground our thoughts when reflecting on the outcome of our decisions.

It provides us with lessons from the past by literally putting in writing how wrong we were at the time.

Decision Journal

Record your feelings and motivations.

You don’t have to show this to anyone. I have done this for a few big decisions in my life. And with the benefit of hindsight, it was so illuminating to see what I was thinking and feeling at the time. ´

Dwelling on Counterfactuals

After the fact, explain how alternative outcomes could have unfolded.

This also helps to combat Hindsight Bias and combat overconfidence. By performing this exercise, events will seem less inevitable.

Getting Reps

Make many and make them fast.

If a decision is reversible, it is often better to just make it and live with it for a while. Nothing is as instructive as seeing the results of your decisions play out.

Decision-making is a muscle. Use it and it will get stronger.

And I hope these tricks can help you a bit. They certainly helped me a lot.

As always, I really enjoyed making this for you!

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Lots of love and see you next time!

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