Foundations of Decision Making

Elements of a decision making process

The following describes the typical elements of a sound decision making process. It draws heavily on an article titled “Introduction to Decision Making” by Robert Harris. Harris notes that the process is not necessarily linear, as consideration at one stage may cause you to reconsider conclusions from earlier stages.

The elements are:

1.Identify the decision you need to make

This would appear a simple step. However, often the focus is on the wrong decision e.g. what shares should I invest in rather than, first, how much investment risk do I need to take?

2.Clarify your objectives

What outcome would you like from making the decision – will it get you where you want to go? Again, making investment decisions without knowing what you are trying to achieve is really putting the cart before the horse.

3.Gather relevant information

The more relevant information you have, the better decision you are likely to make. However, you have to weigh up the cost and time of obtaining information against the potential benefits – all decisions involve some uncertainties. Also, you need to avoid having so much information that you cannot make a decision – “paralysis by analysis”.

4.Develop alternatives

A lot of decision making simply involves taking the first identified alternative that appears better than the status quo. This may be OK for minor decisions, but for decisions of consequence better outcomes are likely if a broad range of alternatives are created and considered.

There are likely to be a number of alternative strategies to achieve your wealth management objectives - the broader the range of alternatives, combined with careful consideration of the trade-offs, the more likely you are to be committed to the chosen strategies.

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5.Rate the alternatives

While having a range of alternatives provides a richer decision making environment, it also raises the problem of how to choose between them. All pros and cons of alternatives are not equal and it is desirable to have a method of weighting them so that alternatives can be compared objectively.

In a wealth management context, the common "currency" for comparison is usually dollars, but in other situations it could be time saved or some other measure that reflects your ultimate objectives in making the decision.

6.Rate the risk of each alternative

All decisions carry some uncertainty. Each alternative is likely to have different degrees of success and failure and at least subjective probabilities ought to be assigned to potential outcomes in an attempt to choose between them.

Also, while most people have little difficulty seeing the upside of a decision, few deeply consider the consequences of a very negative outcome. Even with the best decision making process, bad results occur. We would encourage you to think about how you would cope if the outcome of a decision is particularly negative – it is our view that if you cannot handle the downside, you should not make that decision.

7.Make the decision

Having gone through the process in a depth justified by the importance of the decision, a decision eventually needs to be made. While the choice may be to do nothing, a failure to make any decision is really leaving the outcome to fate.

8.Implement the decision

The best planning and decision making will be all for nothing unless the decisions are implemented. For some, this is the hard part of the whole process as they are concerned that the outcomes are not going to be what they are hoping for.

We take the view that the outcomes are rarely likely to be exactly what you expect – they could be better or worse. However, generally, some progress is made toward the objective and new insights are revealed. The fact of the matter is few decisions are absolutely irrevocable and/or further decisions can be made based on where things currently stand and the learning acquired.

“There are risks and costs to a program of action, but they are far less than the long range risks and costs of comfortable inaction.”
John F Kennedy

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