Aldersgate Advisors

Better Decisions

 

WHAT YOU CAN DO TO MAKE BETTER DECISIONS

"Smart is believing only half of what you hear-
                                                               Brilliant is knowing which half! "  Robert Orben

Whether you are an investment banker, physician, CPA or CEO of a Fortune 500 company, there are certain universal behaviors which characterize the decision making process. While everyone, to varying degrees, falls victim to decision errors, ironically, the smarter, better educated, more successful you are; the more vulnerable you are.

Seldom is a measure of success and competence in one area transferable to other disciplines to the same degree. However, it is human nature to think so. Psychologist refer to this as the "halo effect".

Successful businessmen, physicians, and educated professional advisors are particularly susceptible. They can actually be their own worst enemy when trying to maximize their wealth. They can easily become victims of their own success - and unfortunately, most eventually will: "Pride goes before destruction and a haughty spirit before stumbling." - Proverbs 16:18.

By being aware of how people make decisions, we help minimize your susceptibility to decision errors as well as formulate strategies to exploit the flaws in the decision making process of your competitors - whether direct business competitors or other investors competing for the best investments.

The concepts discussed below are by no means all inclusive of the leading theories on the subject, but should be sufficient to get you started in evaluating your current decision making and information gathering processes.

Research reveals that most decision makers possess only a small fraction of the relevant information needed to make an informed decision and they have a limited time in which to accumulate additional information.

Decision makers working under time constraints, are frequently impatient and as such, terminate their search for additional information prematurely.

People have a limited capacity to process and remember information. People are very selective about what information they attend to.

The ambiguity of most of the information available makes its interpretation necessary. All interpretation is influenced by a person's motives, attitudes, and expectations.

People tend to be more receptive to information that is consistent with their pre-existing attitudes and preferences. Contrary information, or information that disputes, questions, or contradicts, what the decision maker wants to believe tends to be discounted or ignored all together.

It is human nature to hear only what you want to hear - to believe what you want to believe!

There is also frequently a time prejudice to information, or an "order effect", even though the information is equally valid. 

 

Recently received information may be given greater importance and credibility than information received earlier. Or the reverse may happen. Newer, more recent information can also be discounted simply because it is "new" information.

People also tend to be influenced more by information derived from personal experience and observation than by abstract information, such as statistical reports and research surveys, even though the abstract information may be more reliable and representative.

People also frequently tend to be overly optimistic, bordering on delusional, about their desired outcomes. People tend to underestimate the probabilities of negative and undesirable outcomes and overestimate the chances of desirable outcomes.

Decision makers also tend to be overly conservative when adjusting probability estimates of desirable and undesirable outcomes given new information.

Perhaps the most pervasive and costly error by decision makers are those called "attribution errors".

People frequently make inaccurate forecasts by drawing incorrect conclusions and spurious inferences about trends and causal relationships where in fact there is only random variation and chance associations.

Just because X happened and then Y happened does not necessarily mean that X caused Y or that every time X happens Y will also happen. And yet that is exactly what many company business plans and their investors rely upon!