How to Make Better Decisions
Five Mistakes Every Decision Maker Needs to Avoid
Wrestle the situation into a structure, like a tree, that includes the alternatives and captures the possibilities
Gather information about the probabilities
Value the consequences
Alternatives
Information
Value
Mistake #1: We place too much faith in our intuition, even in simple situations.
Our brains are NOT wired to make good judgments about uncertain situations - even relatively simple ones.
Mistake #2: We confuse decisions and outcomes.
We must judge the quality of a decision at the time it is being made, not after the outcome becomes known. We control the decision, not the outcome. So we want to put our efforts into making the best decision we can make. Would you make the decision again?” Hannah Winter
Mistake #3: We focus on past (sunk) costs that have already been incurred and cannot be recovered.
Decisions are about the future. Money that is already spent (sunk) is money that doesn’t matter. Future costs are all that matter. Yet people focus on money already spent in decisions and refuse to let go of the past.
Mistake #4: We fail to think through the value of risk mitigation.
The value of risk mitigation - as well as the value of gathering more information - can be calculated. But we make many decisions to mitigate risk or gather more information without truly understanding the value.
Mistake #5: We are risk averse, even in situations that we can easily afford.
People have an aversion to loss, which distorts their attitude and inappropriately affects their appetite for risk-taking. This leads us to leave value on the table.