Financial Decisions - The Real Story

Stuffing, Cranberries and Great Decisions

For years stuffing and cranberries have shared my Thanksgiving plate. They've lived close to each other on the plate and some of the cranberry juice even trickled into the dressing, but they always remained independent food elements. This year, in a moment of pure inspiration, I made the decision to pour the cranberries over the top of the stuffing. It just made sense.

And it turns out that the combination was sublime! It took the dressing from great to gourmet. The sweet/tart flavors of the cranberries combined with the salty/savory flavors of the stuffing were incredible! You'd be hard pressed to find a better combination in a nice restaurant. I had to make sure everyone at our Thanksgiving table tried the combination. In retrospect, it makes perfect sense that these flavors would combine so well, but for years I never thought of it.

I wonder what caused me to make that decision. Where did the inspiration come from? Why, after years of sitting next to each other, did my mind finally make the connection that these two elements needed to be combined? Are the inspiration and the decision driven by nothing more than chance?

I'm very curious about the process that went in to making this decision. I recall listening to a discussion about why the Apple headquarters was designed with one restroom in the middle of the building. Steve Jobs indicated that he designed this intentionally in order to increase the "friction" between employees. The more often they passed one another and came in contact with each other, the more potential to share ideas that might spark a moment of genius.

I think my stuffing/cranberry decision might have been nothing more than years of "friction" finally resulting in that spark. I made the decision, but only because the environment was set up for that decision to occur. If I had kept my cranberries in a separate bowl all those years, the idea may never have hit me and the decision never been made.

It makes me wonder how else I need to design my environment to make great decisions. What do I need to change to make good financial decisions?

HOV Lanes and Tax Cheats

My daily drive to work takes me up Interstate 95. Every day I watch an odd thing happen. I'm passed by individuals driving 85-90 MPH, despite the speed limit being 65MPH. Oddly, if I happen to be in the farthest left non-HOV lane, they generally don't move into the HOV lane to pass me, choosing instead to sit behind me until I get the opportunity to move over.

There seems to be some very unusual decision making going on. Driving significantly over the speed limit is against the law and has been cited as one of the leading causes of traffic accidents. Driving in the HOV lane with only one occupant is also against the law. I doubt it causes nearly the same safety risk as speeding, however. So why the very different decisions? Why chose the legal risk and safety risk of speeding, but not chose to illegally use the HOV lane even if it helps you get where you’re going more quickly and possible more safely? Why is one bad decision deemed acceptable while the other is determined to carry too much risk?

Socially Acceptable & Anonymous

I think there are a couple critical factors. Speeding is a socially acceptable choice. Virtually every car is speeding by some small amount. Speeding a bit more than the group may feel less bad. Speeding is also anonymous, especially when speeding among a flow of traffic also driving fast.

Using the HOV lane inappropriately is very different. Drivers generally honor the rules by only using the lane when their vehicles have more than one occupant. Using the HOV lane also isolates you. You drive on an island where people can easily see you breaking the rules. This choice is neither socially acceptable nor anonymous.

Socially Acceptable, Anonymous Financial Decisions

I think certain parallels can be drawn between this faulty traffic decision-making and personal financial decision-making. We certainly see poor financial decisions being made all the time that are socially acceptable.

One such example is paying taxes. There are plenty of examples of this, many you can probably identify with. Whether it’s a family member discussing how they write off 100% of the use of their personal vehicle for business use or a handyman asking for under-the-table cash payments for doing a side job, we hear and accept these stories all the time. They are socially acceptable, so much so that people are willing to discuss them!

Both are socially acceptable financial decisions, and both run afoul of tax law. Both can be done in relative anonymity and can be rationalized with no more logic than "everyone else is doing it!" They are poor financial decisions, yet people make them because there is a feeling many people cheat a little on taxes and it’s easy to do so without drawing attention to oneself. It's no different than speeding with the flow of traffic on the highway.

Small Gets Big

But this faulty decision making process can lead someone from small poor decisions to much larger ones. Like the driver that decided speeding at 90 MPH is really not that different than speeding at 70MPH, a small socially acceptable poor financial decision can become a larger one. What was a few dollars paid in cash for some work on the side might grow into keeping large pots of income off the books when filing taxes. A small bit of fudging on a vehicle use deduction could morph into phony charitable deductions or made-up business expenses.

The same process and rationalization that went into the small poor financial decision works in the bigger poorer financial decisions. Cheating a little on taxes is still socially acceptable (now a little is just being redefined) and it is still anonymous. This rationalization tells you to fire away!

It’s a bit frightening. There's not much effort needed to rationalize increasing speeding from 70 to 90MPH. Likewise, not much is needed to move from small poor financial decisions to very large high risk ones.

Good Decisions, Not Good Outcomes

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.