CFL: In your work with professional investors, how consistent is the decision-making behaviour you’ve seen?
NB: As you might expect, I’ve seen a full spectrum of decision-making behaviour: from intellectual to instinctive, rational to emotional, adaptive to maladaptive.
Some people are extremely thorough in their analysis of the options, scenarios, risks and potential outcomes; others literally make a gut decision within a few seconds. Some have systems and due diligence processes; others tailor the decision-making process to the specific case.
CFL: Are there any decision-making errors that you see consistently?
NB: Yes. Some key mistakes I often see decision-makers commit include:
- Trying to make a decision before they have the necessary facts or a thought-out view of the outcomes
- Procrastination, because they let anxiety and fear get in the way
- Failure to see the big picture, or the wood for the trees
- A lack of awareness around their own biases (cognitive, emotional, social, informational) and underlying assumptions
- Using intellect, but ignoring intuition or the information contained in the intense emotions or bodily sensations that can arise when a decision point comes
- Wasting time on obsessive research
- Letting ego, reputation, shame, embarrassment or conflicts distort the decision
Each decision is different, but the solution to making decisions well lies in running through the intellectual analysis and then integrating that with the heart, gut, body and consciousness. Once you’ve done this, the best answer usually pops out, clearly made, with a to-do list and a lot of freed-up energy.
CFL: The science shows that people feel better about a decision they make when there are fewer options. Why is this and what’s the solution for a decision-maker like a portfolio manager or trader who always has a lot of options?
NB: Too much choice can be overwhelming. As a Brit, I remember the first time I went to New York. My girlfriend sent me out to get a carton of milk. In England there were three choices: full fat, skimmed or semi-skimmed. But in New York, I had a whole aisle full of choices, none of which I understood. I returned 20 minutes later, exhausted and embarrassed with no milk.
It’s very stressful to have too many choices, especially when the differences between them all are small or unclear. Then, once we’ve made a choice, we tend to worry about the missed opportunities and can waste a huge amount of time and energy ruminating over that.
Have you ever spent half and hour scrolling through Netflix to choose a film from the thousands of options? Sometimes it’s so soul destroying that you give up and don’t bother.
Yet, you can make a decision easier by narrowing it down. Shall we watch a thriller or a comedy? Comedy. OK. One we’ve seen before or a new one? Slapstick or dark? OK. Here’s two options. Choose one now. That’s a lot easier.
The paradox is that we’re evolved for both simplicity and complexity. Mastering that requires integrating intellect with intuition. That way, we leverage a kind of holistic intelligence that is very powerful and innate to each of us.
I find the best investors achieve this by having clear systems – algorithms, rules and routines, doing a thorough intellectual analysis – which they then run past their ‘other half’ – their heart, gut instinct, peers, advisors, inner critic, wise inner investor and future vision.
This involves, on the one hand, being very clear about your criteria, measurements, stakeholder positions, and desired outcomes. On the other, you need to fine tune your intuition, your heart intelligence, your gut instinct, and be aware of your cognitive shortcuts.
CFL: Fund managers tend to value optionality and put off making decisions until they have to. Is that behavior helpful or detrimental?
NB: It’s a balance. Sometimes striking while the iron is hot and making a decision as the moment arises is the right thing to do. After all, the opportunity can pass or be snapped up by others. For some, acting quickly is the best way to avoid getting tied-up with analysis-paralysis.
However, we can also make impulsive decisions which are flawed with biases and then live to regret them.
Good reasons to delay a decision include needing more information or taking a moment to thinking through the outcomes and measure the risks.
Sometimes it really is better to sleep on it or to go for a walk in the woods. Our brain, heart and gut all synthesize very complex, multidimensional information and that happens best when we get our rational mind out of the way and let it tick over in the background. If you can’t make your mind up, it can help to take a break, move your body, be with other people, listen to music, mediate or stroke the dog.
Another tactic when considering a big decision is to add a controlled amount of emotional intensity. It’s one thing to consider different options as an academic exercise but quite another when you have to hand over your money. You can simulate this by taking steps in the direction of a decision – for example, make a small investment or sell a few shares and see how it feels. That emotional or physical reaction