Investors: did you decide well?

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Now look I know we all want to put 2020 behind us and move on as fast as we can, but investors would be well served in reflecting on their decisions.

Seeing we saw almost a whole market cycle encompassing fear, panic, greed and euphoria in just one twelve month period, we certainly got quick feedback on our decisions.

A useful exercise for any investor, investment committee, trustee board etc at this time of year is to ask the following questions –

What were 5 decisions you made in 2020?

Often we spend so much time enacting and following through on previous decisions, it can be hard to identify clear decisions. But there ought to be some.

Which was the best?

Which was the worst?

Why? (And don’t just focus on the results of the decisions)

Looking back, what did you get wrong going into these decisions?

Perhaps in hindsight you misread your own preferences or risk tolerance, perhaps your prior assumptions for how a strategy would perform were way off, your understanding of risk was wrong or you weren’t operating with the margins of safety you thought you were, or were you overconfident. Maybe your mental model of the world was off, did reality fall outside the bounds of what you thought was possible? What did you really need to know at the time that you didn’t? Did you rationalise something at the time that in hindsight was a mistake? Finally it is worth asking: what was the counterfactual? What realistic alternative did you consider at the time based on what you knew then.

Of course good and bad luck can be the explanation too, and often is (on both sides of the equation) but as Annie Duke emphasises in her excellent book How to Decide it pays to understand how we see things differently now the “veil of ignorance” through which we see the world when making a decision is lifted.

Annie reminds us that while good or bad outcomes can have either good or bad decisions underlying them (as represented below) , we far too often let two of those possibilities fade into the background and assume just assume everything is earned reward or just deserts based on the outcome:

Two decision making tips to bear in mind for the future, again from Annie’s work with the Alliance for Decision Education are:

1. Keep a decision journal. For some behavioural reason this simple-sounding solution is resisted so furiously by our inner-selves that it hardly ever gets done (perhaps because subconsciously we know how flawed our judgement will be shown to be), but time and again the like of Daniel Kahneman, Shane Parrish, Annie Duke and other great decision-thinkers cite this as the most important thing you can do. Here’s a good simple example from Shane Parrish whose work on decision making is also excellent and useful for investors.

2. Conduct a pre-mortem. Again, tends to be resisted heavily as the last thing people want to focus on is how something could go wrong, right? It is likely to weaken conviction in the decision and even perhaps stop us in our tracks completely. But it can be reframed more positively and helpfully in protecting us.

Annies appearances on a couple of popular investing podcasts were among my favourite episodes of 2020. Heres her conversation with Ted Seides, which is well worth a listen.

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