I have spent quite a bit of time thinking about how we make financial decisions and I have some opinions about what the decision-making process looks like in action. As a starting point for this blog, I'm going to share some these personal opinions over the next few weeks before diving into the reading and exploration of others' work and research. This will get my own biases out in the open so that you can better judge my future writing.
So, let's begin with one of my most unconventional beliefs about decision-making: good decisions are not determined by the outcome of the decisions. In fact, a great decision could result in a terrible outcome! I say this to people and they are ready to write off anything else I say. How could the outcome not be somehow related to the whether a decision was good or not?
As an example, consider the following.
You are deciding whether to take a vacation or not, and where to go. You save for a vacation within the framework of your overall budget. You put hours in researching locations that will be suitable for the type of vacation you want to take. You talk to people who have taken similar trips to get their input. You spend time finding the best prices and most convenient travel arrangements. You've done all your research and you make the decision to take a vacation.
Decision made...hotel reservations are set and airplane tickets are booked. Time off from work is arranged. You have arranged for someone to take care of your pets while you're gone, and you've set up systems to make your house appear not vacant. You've notified family and friends that you'll be traveling. You've made a good, well-considered decision about this vacation.
Your departure date arrives and you head to the airport. You breeze through security, having planned your trip at a low traffic time, and everything is going super smooth. Seems like you've made good decisions about this vacation
As your plane lifts off, a large goose flies into one of the engines sending the plane crashing to the ground killing everyone on board. Pretty crappy vacation!
But was the decision to take that vacation a bad one? Absolutely not! Just because you fall to an untimely, fiery death doesn't mean getting on the plane was a bad decision. You did everything you could to make sure you made good decisions. There is simply tons of stuff that goes into the outcome of your vacation decisions that you don't have any control over. This is just as true when planning a vacation as it is when making financial decisions, some that don't fully play out for months, years or decades.
We don't have much control over many factors that determine the outcome of our decisions. Therefore, we can't judge our decisions by their outcomes. Good decisions can result in disastrous outcomes. Good decisions can also result in good outcomes. The point is, there isn't a high direct causal link between the quality of decision and the quality of outcome.
I do believe that good decisions increase the likelihood of good outcomes, however. Good decisions should result in more consistent and more frequent good outcomes. Further, consistently bad outcomes may be a sign that there is a flaw in a person's decision-making process. Patterns of outcome results do have a link to quality of decisions.
Point is, any individual decision cannot be judged by its outcome. To judge each decision as good or bad by its outcome is not an accurate measure.