Wednesday, October 31, 2012

Deciding With Limited Resources (The Resource Circle)

A frequent challenge I've run across when working with people is helping them make decisions in a world of limited resources. Intellectually the people I’m working with almost always understand that they have limited resources and grasp the notion that deciding on one option limits resources available for other decisions later. But sometimes the intellectual grasp of this doesn't translate to a practical understanding. This is particularly true when two seemingly independent decisions draw from the same pool of resources (time, money, ability to accept risk, etc.)

To combat this, I've come up with an exercise to help illustrate the point. The Resource Circle exercise provides a tool to help people understand that one decision impacts many other decisions. The Resource Circle exercise is very simple. You can try it yourself by printing the attached worksheet and following the instructions.

Using The Resource Circle worksheet, I ask people to write down their goals and objectives inside the circle. A goal of greater importance should be drawn larger and with a heavier hand. Objectives of smaller importance should be represented with smaller writing. The goals and objectives should include tangible items such as a new car and a retirement goal, but also intangibles such as lower comfort with risk and strong desire for tax avoidance.
After including only a few important goals written large, space quickly runs out. And that's the point. Resources are limited, and even unrelated goals draw from the same pool of same resources. Pursuing one goal leaves less time or energy or money to pursue another goal. Goals can continually be added, but they need to be squeezed into ever shrinking spaces in the circle.

The exercise can lead to a variety of discussions with clients. A planner can help a client identify goals and objectives that didn't make it into the circle, but have been discussed in the past. Completing the exercise can lead to a discussion about prioritizing certain goals over others. An important, but sometimes overlooked, conversation that may result is how to increase the pool of resources.
Improved decision-making requires a clear understanding that each decision impacts other decisions. The Resource Circle is an exercise that can help make this point clear. There's no magic here, simply a tool to illustrate one element in the decision-making process.

I love an exercise that can help drive a conversation with clients around making good decisions. I think The Resource Circle accomplishes this in a very understandable way.

Monday, October 22, 2012

A Super Simple Secret To Improved Decisions

Is it really possible that a pen and paper may be the ultimate tool to improve decision-making? When I began this blog, I thought it would take work to stumble upon ways to understand and improve decision-making. Yet, in only my third post (Bad Outcomes, Revisited), I bumped into the idea of a decision journal.

The idea is simple enough. When making major or notable decisions, write down the thought process leading up to how the final decision was made.  Really it's no different than any other type of journal a person might keep, but in this one you document your daily decisions. 

While it seems simple, the impact could be profound. The decision journal becomes a record of how we went about making a decision. The journal can be used to remind us in the future of what processes appeared to work out well and which rationale ended up in a poor outcome. The journal offers us reminders of how we have made decisions in the past.

And this could be very important in improving decision-making. Without some record of our decisions, we still look to past decisions to help make future ones. We scour our memories for similar decisions and rely on those experiences to guide us. The problem as, we're sort of bad at remembering the past clearly. Hindsight bias changes the way we view the past decision in the present. Confirmation bias helps us remember the decisions that support our current position while overlooking decisions that might offer an argument against that position.

A decision journal offers a layer of protection against the effects of these. I doubt that the protection is perfect or absolute, but I suspect it is very helpful.

I'm going to beginning digging into the decision journal more and look for research on the impact of decision-making record keeping on future decisions. In the mean time, I intend on maintaining a decision journal for myself. How about you?

Monday, October 15, 2012

Bad Outcomes, Revisited

In my last post Good Decisions, Not Good Outcomes I made the argument that a good decision doesn't necessarily result in a good outcome. Further, I argued that a bad outcome does not mean a decision was bad. I'm not sure how effective my argument was, but fortunately I can today share a much better take on the same argument.

Thanks go to  Susan Weiner (@susanweiner) for tweeting to me the article linked below from the Farnam Street blog. The blog post speaks to the issue of decisions versus outcome in a very effective way. I found the Decision/Outcome matrix to be particularly compelling.

What Happens When Decisions Go Wrong

If we can agree that the quality of decision and quality of outcome are not directly tied to one another, we have a new issue to deal with. Why bother with trying to make good decisions at all if the outcome is still a result of chance?

As stated in my previous post, I believe that good decisions and a good decision-making process should result in a higher frequency of good outcomes on the aggregate. Any individual decision may still turn out poorly, but the likelihood of bad outcome is lower than for decisions made with a bad decision-making process.

Good decisions and good decision-making remains important even though chance plays a large role in final outcome.

The linked article explores another topic I want to dive into more, the Decision Journal. I've long been interested in the benefits of journaling and often speculated that a client/planner journal could be beneficial in the financial planning relationship. A decision journal sounds particularly compelling. I will be exploring that more in the near future.

For now, I'm glad to have had a well laid out agreement with my position shared with me. I think breaking the decision/outcome link is an important starting point for this blog.

Wednesday, October 10, 2012

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.

Monday, October 8, 2012

Getting Started

It's been some time since I last ran a personal blog, and it is something I've missed. I enjoy blogging. Nah, I love blogging and I love writing and I love sharing my sometimes zany ideas. It is high time I get started again.

I strongly believe that personal financial planning is about helping people make good financial decisions. There's a lot of other stuff we do as financial planners, but guiding people through the decision-making process is where the most profound value of financial planning lies.

And that's why I decided to start this blog. I've been making my argument about decision-making for some time, but now I want to begin exploring what it means to actually help people make good decisions.

There are many questions I want to explore. How do we make decisions? What factors impact our decision-making? When do we make a wise decision and what leads our decision-making astray? How do we decide if a decision was good or bad in the first place? And how do we improve this process, both as financial planners and as people?

I'm not sure the answers are out there, but I think it will be fun to look for them. I look forward to getting started, although my initial posts may flow out slowly for a while. One of my own largest major financial decisions (a move to Florida from Wisconsin and new job) still consumes a huge amount of my time. But things will pick up.

So join me on this journey as we explore financial decision-making. I bet there will be some surprises and some shocks. Maybe we will even change the world! Then again, I'd be happy just to improve the way financial planners help people a little bit.

Who knows where we might end up.