Saturday, August 13, 2016

Avoiding stupidity


If you’re an amateur your focus should be on avoiding stupidity.

In my opinion, two main factors contribute to our inability to make good initial decisions. First, we don’t have the time to think. And second, we don’t have a firm understanding of how the world really works.

One of the most common things people ask me is how we can improve our decisions. Better decisions are a function of two things that sometimes conflict: making fewer mistakes and having better insights.
1)Rationality
2)Emotion-We tend to think of emotion as the enemy of rational behavior and that removing emotional biases from our decision making process will make us more rational
3)Biases-But we often have patterns of behavior that cause us to fall short on rational thinking.
One way of looking at this is that our brains have two ways of reacting. One is an automatic mode. This is when our minds, without thinking, have an immediate reaction to a situation with little or no conscious effort.
This is how we evolved. This is our instinct. I don’t have to think very hard when I see a lion coming at me. I quickly respond to the situation in order to maximize my odds of safety. Academics call this System One thinking.
System Two thinking is when we allocate our scarce resources of attention and effort to mental activities in order to (hopefully) make better decisions. We must pay attention or we are likely to end up behaving in a way that is not rational.

Most of us make decisions in an environment where it is very hard for us to behave rationally.
I’m hard pressed to imagine an environment less conducive to rational decision making than that of the modern office worker. It is hard to make rational decisions in this pressured environment.
Buffett is smart enough to structure his environment to reduce decisions, interruptions, and encourage focus.
Our routines influence our decisions as well. One of the objectives of good decision-making is to ensure that decisions are not influenced by irrelevant information.
“The most successful people don’t have super-strong willpower when making decisions. Rather, they conserve their willpower by developing habits and routines, so they reduce the amount of stress in their lives. … The more choices you make, the harder they become. To save energy your brain starts to look for shortcuts. One shortcut is to be reckless and act impulsively (rather than rationally). The other shortcut is to do nothing, which saves as much energy as possible (and often creates bigger problems in the long run).” — Roy Baumeister
If you agree with that then it impacts how you organize your day. You may decide to meet clients in the morning as you know that later in the day, they (and you) are likely already at a point of “decision fatigue”.

“You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.” — Warren Buffett

Carl Gustav Jacob Jacobi, the German mathematician said, “invert, always invert” recommending that “many hard problems are best solved when they are addressed backward.”
This model is one of the most powerful thinking habits we can adopt. “Indeed,” says Charlie Munger, “many problems can’t be solved forward.”
Think about what makes life good. Now invert the process and think about what would make life bad. Knowing what would make life bad gives you a shortlist of what to sidestep. Both thinking forwards and thinking backwards can result in action, however, despite your best intentions, thinking forward can in fact increase the odds that you’ll cause harm, while thinking backwards is actually less likely to cause harm – call it the avoiding stupidity filter.

Decision Journals
When asked how we can improve decisions, Daniel Kahneman, one of the preeminent psychologists in the world who won a Nobel prize in economics, said, without hesitation, buy a very cheap notebook and start keeping track of your decisions: A decision journal.
The basic idea is that whenever you’re making a decision of consequence you should write down what you decided and why. Perhaps you want to do this with your clients, ask them these questions as they are making an investment. It could facilitate great future discussions, regardless of whether the investment is a success or failure.

Conclusion
The long and short of it is: In your decision making, spend less time trying to be brilliant and more time trying to avoid obvious stupidity. Avoiding stupidity is easier than seeking brilliance.

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