How to Make Better Decisions.

How to Make Better Decisions.

How To Make Better Decisions?

When was the last time you made a decision? About 15 seconds ago when you decided to read this blog. We make hundreds, if not, thousands of decisions each day. These decisions, made consciously or unconsciously shape our lives.

I, being an Investor and a Trade make a lot of decisions which a kinda tough. Each decision matters in my overall performance as a trader. And I love thinking in Systems. I am a firm believer that systems thinking enhances decision making and productivity.

In the next 10 minutes I’ll share my (current) method of decision making. You can either use the same, or you can modify it according to your needs.

decision

Above is a graphical representation of my method of decision making. I’ve used a flowchart to explain it in a single glance. Don’t worry if you didn’t understand anything. I personally use 7 steps while making decisions.

#1. Importance.

Not all decisions are worth the same. Some decisions are important and they can affect your life significantly, while other decisions have little to no impact over the long run.

A decision such as “What shall I have for Dinner?” or “Should I wear a black Polo Shirt or a Navy Blue shirt” don’t carry much significance. While decisions like marrying someone or choosing a career are pretty important.

How do you know which decisions are important?

You just know. Deep down most of us know which decisions are important and which ones don’t really matter. But if you’re still unclear, there are 3 questions I like to ask myself.

  1. Who is affected by this decision? (more people affected = important decision).
  2. What is the Time and cost of making this decision?
  3. How significant will this decision be 3-5 years from Today?

The decision is either important or unimportant. If it is unimportant you can either delegate it or you can make a quick decision without thinking much. But if it’s an important decision, read the steps given below.

#2. Gather all Data points and Facts.

I like to conclude things rationally based on data points. If you’re thinking of choosing a career, you can list down all the data points you can gather. Like the average duration of completing the course, the costs involved, the success rate, average salary, outliers, industry data and numbers about the major companies in the market.

The more relevant data you have the better. But data is endless. There are literally thousands of articles on the internet on any subject. You can’t read everything.

What I do is I spend 1-7 days gathering data without concluding anything and by the time I have enough relevant data, I can find out the conclusion. Data analysis is a whole new subject.

#3. The 3 Scenarios.

I like to think of the Best case, the Worst Case and the Most Probable scenario when I make a decision. What is the best thing that can happen to me if I make this decision? How likely is it?

What is the worst thing that can happen if I make this decision? Can I live with that? Is there a way to reduce the risk?

While choosing a career the worst thing could be getting a low paid unsatisfying job. While starting a business the worst case thing could be that your business fails and you lose all of your savings and maybe get a divorce. Can you live with that? What can you do to reduce the downside?

What’s the most probable scenario?

For this you need data. What happens to the majority of the people who choose xyz career? What happens to the majority of start ups that operate in that Niche?

When you have an idea about what could happen, good or bad, when you make a decision things become much easier.

#4. DTR.

DTR aka Dollar, Time, Return is one of my favourite concepts of all time. If I think about a stock, I calculate, “Analysing xyz stock will take me about 2 hours. And I could spend 50,000 to buy shares of this stock for a swing trade. Holding that trade for 2 weeks will give me around 8% returns and the worst thing that could happen is my stop loss getting hit i.e. me losing 2%. 2% for 8% is 4R”.

When I analyse these 3 factors it makes things way easier.

Getting in a relationship. How much time and money will it take/cost? What return can you expect? Reading a book. How many hours will it cost you, what return can you expect?

When I think in terms of ROI and Risk, I tend to make better decisions. Look at every decision as an investment. An investment of your time and/or your money. Is it worth the cost for the reward you get? Think risk reward.

#5. Strategy.

I love planning various strategies. There are multiple methods of planning a strategy, and I could probably write a book on that. A strategy is simply the roadmap to your destination.

  1. Gather data.
  2. Know Thyself.
  3. Find out your end Goal or the Root cause analysis.
  4. Necessary people and skills you’ll need to achieve your goal.
  5. Problems/ risks you’ll face.

These are 5 things to think about while formulating any strategy. You could use something more scientific or a deeper concept. But this is quite effective too.

#6. Alternatives.

When you’re confused between two things, sometimes the best option is to choose the alternative. Always try to look for alternative things or options you can take.

These alternatives will shift the risk reward in your favour.

If you’re trying to decide between starting a blog or a podcast, you can find and alternative and compose both of them. You could write a blog and read it in form of a podcast. That solves both the problems.

Some problems don’t have any or a lot of alternatives. But if you manage to find an alternative, chances are that you’ll end up making a better choice.

#7. Multiple Time Frames.

Whenever I’m analysing a stock, there are multiple views that could be formed based on different time frames. The stock could be bullish on intra day, bearish on the 1 hour chart and bullish in long term perspective.

Similarly a decision can have multiple impacts on various time frames. Choosing to do something may have a pleasurable impact in the short term, but it could be harmful in the long run.

Working out and eating healthy may be unpleasant in the short term, you might face pains or you might have to give up junk food, but it’ll have a positive impact over the next 2-5 years.

What impact does your decision have, both on short as well as long term’s perspective? When you think about macro instead of the macro, things get clearer.

The Bottom Line.

Investing and trading can teach a lot of things about decision making, risk management, logical and critical thinking, etc.

Honestly, I don’t use all the 7 steps for every decision. I use the first 5 for important decisions or I decided instantly when the decision is insignificant. But if it’s a life changing decision, I tend to take more time and think rationally. Not using a bias while making a decision in itself is a challenging task.

TL:DR-

  1. What is the importance of the decision?
  2. Gather Data and Facts.
  3. Find out the best case, the worst case and the most probable scenario.
  4. Find DTR.
  5. Develop strategies.
  6. Find alternatives.
  7. Think about the multiple time frames.

-Vikrant C.

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