It’s been a busy two weeks in the Rothwards household!
Last Monday, Kim and I had inspections on the home we want to buy. The results weren’t good. The inspector concluded that, overall, the house shows evidence of deferred maintenance. Needed repairs have been left undone. Translation: Nearly everything related to the exterior of the home needs work. The roof needs to be replaced, as does the siding. The deck and fence are beginning to fail. And, worst of all, the foundation may be severely damaged.
When I was younger, this news would have made me distraught. Back then, I was an emotional buyer, not just for small stuff but also for big things like houses. When my ex-wife and I bought our home in 2004, for instance, almost everything about the transaction was emotional. I loved the house (or the idea of the house, anyhow), and that clouded my judgment.
Now, in 2017, I find that I’m much more rational. I understand that there are lots of other houses out there, and that Kim and I could live almost anywhere and be happy. Sure, this particular place meets most of our needs — and it’s cute — but neither one of us is overly attached to it. We’re making this purchase from a business perspective first and a lifestyle perspective second.
In short, we’re doing our best to make a rational decision instead of an emotional decision.
How to Make Better Decisions
When I first announced that Kim and I were looking for a not-so-big house, Money Boss reader David Hatch suggested I read Decisive by Chip and Dan Heath. This book is all about how to make better decisions in life and work.
“If you study the kinds of decisions people make and the outcomes of those decisions,” the authors write, “you’ll find that humanity does not have a particularly impressive track record.” Business decisions are frequently flawed. On a personal level, people fail to save for retirement. We make irrational purchases. We date people we know we oughtn’t date.
How can we be make better decisions? It all comes down to process.
“Understanding our shortcomings is not enough to fix them,” the authors write. “It’s hard to correct a bias in our mental processes just by being aware of it.” Just because you know which foods are bad for you doesn’t mean you’ll stop eating them. Being aware that you tend to spend compulsively won’t stop you from spending compulsively. To actually make better decisions, you need a plan.
According to the authors, there are four major villains when it comes to making good decisions:
- Narrow framing, “the tendency to define our choices too narrowly, to see them in binary terms”. Too often, we see our options as either-or, when in fact we have a wide array of choices. We ask ourselves, “Should I do this or that?” instead of “What is my best option here?” So, for instance, you might ask “Should I buy a new car or not?” instead of “What’s the best way I could spend money to improve my life?” We ask the wrong questions. Narrow framing makes you miss options.
- Confirmation bias, which occurs when we reach a quick conclusion then seek only the info that supports this belief while ignoring everything else. “When we want something to be true, we will spotlight the things that support it, and then, when we draw conclusions from those spotlighted scenes, we’ll congratulate ourselves on a reasoned decision. Oops.” Confirmation bias leads you to gather self-serving information.
- Short-term emotion. When making difficult decisions, we get caught up in our feelings. Our minds are so clouded with pros and cons and what-if scenarios that we can’t think straight. We lack perspective. We’re unable to take the long view. Short-term emotion will often lead you to make poor choices.
- Overconfidence — unfounded belief in our own abilities and in the direction the future will take. “The problem is that we don’t know what we don’t know,” the authors write. They cite some findings that boggle my mind. For instance, once study showed that when doctors said they were “completely certain” in a diagnosis, they were wrong 40% of the time. (There are lots of studies like this.) Overconfidence leads us to make poor predictions — and to overestimate our own abilities.
If these are the four villains of decision making, then how do we defeat them? Again, it comes down to having a process, a formalized strategy to help make better decisions. And that’s what Decisive is all about.
The Heaths suggest that for each of the four villains of the decision making, there’s an effective strategy to defeat it. Taken together, they call their system the “WRAP process”. It works like this:
- Widen your options to avoid narrow framing.
- Reality-test your assumptions to avoid confirmation bias.
- Attain distance before deciding to avoid short-term emotion.
- Prepare to be wrong to avoid overconfidence.
Let’s look at each of these steps in a bit more detail. [Read more…]