The quality of our decisions significantly impacts our lives. Good decisions keep us out of trouble while bad decisions mire us in misery. Or at least that’s the common perception. Like most things in life, it’s more complicated than that. Judging the quality of a decision requires more effort than just observing the outcome. Good decisions can yield undesirable outcomes and bad decisions can produce desirable ones. Some factors that we must consider when judging a decision are the amount of information we had at the time of the decision, the quality of that information, the decision making process, likelihoods of certain outcomes, and, of course, luck.
There’s a family story we’ve heard about a particular shot in a small town youth basketball game that shows how outcomes don’t always match the quality of a decision. The team was a rag-tag crew of kids who enjoyed playing various games together, and a coach. The two characters of this story are a player with the nickname Wolf and the coach.
Wolf and his team were playing their nearby rivals. It was a close game. At one point in the second half, Wolf had the ball and was dribbling down the court. He was being pushed to the outside, and his dribbling picked up speed. Wolf had progressed to the very corner of the court, his momentum about to carry him out of bounds. He was running out of space and needed to play the ball to a teammate. His teammates knew this too and were yelling for the ball. Instead, Wolf lobs the ball up towards the goal in a wild shot.
“WOLF!” bellowed the coach. “What are you—?”
Wolf hits the ground. Then the shot miraculously drops in. Nothing but net.
The crowd erupts.
“Great shot! Great shot!” yelled the coach, bouncing enthusiastically on the sidelines.
That shot has been relived for years afterwards in the small town.
This story is enjoyable for its comedic quality. It’s also a brilliant narrative for understanding (or misunderstanding) the quality of a decision.
Decisions are deceptively difficult to unwrap. We are often misled by the simplicity of looking at outcomes to judge the quality of a decision. The true quality of a decision is based on several factors, and the decision’s outcome is sometimes the least helpful of them all.
Factors to Judge the Quality of a Decision
It’s often not enough for us to use only one factor when assessing a decision; there are usually multiple aspects to consider in order to understand what information the person was working with at the time. That’s the issue with only looking at outcomes of a decision: they distort our understanding of the decision because we know how it turned out. We suffer from hindsight bias. Knowing the outcome of a decision fools us into believing that outcome was inevitable.
Instead, we need to remove ourselves from the present where the outcome is known and try to transplant our minds into the past when the decision was made. We have to put ourselves in the decision-maker’s shoes to evaluate their decision-making process. What information did the decision-maker have? What was the quality of that information and how was it framed? Was there a (real or perceived) time limit to make the decision? What were the probabilities of various outcomes? Who all was involved? As one can see, this process is far more complicated than just looking at the outcome.
A mistake is not something to be determined after the fact, but in light of the information available until that point.
Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, by Nassim Taleb
Luck Plays a Role
We cannot forget about luck. Luck (or the lack thereof) often impacts the outcomes of decisions. Frustratingly, a well thought out decision can yield a suboptimal outcome due to unlucky circumstances. Decisions—especially complex ones—are rife with variability; very little is guaranteed. Because of this lack of guarantee, the converse is true as well: a poor decision can yield fantastic results. Both scenarios provide unhelpful feedback, telling us what we did was good if the outcome worked or what we did was bad if the outcome was poor. Looking at only the outcome is a noisy practice that lacks meaningful signal.
Let’s consider an easy example to show how luck affects the outcome of an event. Say a Blackjack player is dealt a 10 of hearts and a 9 of clubs. Together they total 19. In the game of Blackjack, the objective is to get your hand to sum 21 or as close as possible without going over. For our player, 19 is very close to the 21 threshold. Using probabilistic thinking, the likelihood of the dealer drawing an ace or a 2 is very low and the likelihood of a higher card being drawn—and thus busting the player over 21—is very high. Let’s say our player with 19 directs the dealer to draw another card for him and gets a 2 of diamonds. The player gets 21 and wins the hand. But was that a wise decision? Obviously not. There was no way of knowing the next card would be a 2 of diamonds, so the player had to resort to probabilities, which were not in his favor. The player got lucky.
Those who were unlucky in life in spite of their skills would eventually rise. The lucky fool might have benefited from some luck in life; over the longer run he would slowly converge to the state of a less-lucky idiot. Each one would revert to his long-term properties.
Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, by Nassim Taleb
Similarly, Wolf, the youth basketball player from the beginning of this post, made a decision to throw up a wild shot when his head was down and his momentum was carrying him away from the basket. He was not a professional who had practiced fade-away shots for hours on end. He was a kid who played basketball recreationally in a small town for a few months each year. The likelihood of him sinking that shot was dismal. And yet he did. He got lucky.
Luck Distorts Feedback
The problem with evaluating only the outcome of an event is that we do not easily comprehend the role luck played. And when we don’t know how much of the outcome was due to luck (or the lack thereof), the outcome seems justified. This is how the feedback loop becomes distorted.
Feedback loops are critical to improving how we think and what we do. Just as a child learns to not touch a hot stove by actually touching it or getting close enough to feel its heat, we too calibrate our behavior based on the feedback we receive from others and our environment. When that feedback gets distorted by something like luck, it takes us longer to learn.
Focusing on results might be good for short-term performance, but it can be an obstacle to long-term learning.
Think Again: The Power of Knowing What You Don’t Know, by Adam Grant
The distortion gets amplified when we get noisy feedback from both the environment and others around us. In the basketball story, Wolf received feedback from the environment (the ball went in the basket) and the people around him (the crowd erupting and his coach yelling, “Good shot!”). One form of feedback is often enough for us to heed its meaning. Both forms compound on each other and make it nearly inevitable that we internalize the feedback as truth. That means Wolf would likely try another unnecessary, crazy shot.
Developing a Strong Decision-Making Process
In decision-making, process is everything. Even though luck may distort the outcomes from time to time, repeated deployment of a strong decision-making strategy will yield optimal results. In the book Think Again, Adam Grant reflects on decision-making and what a good process constitutes.
A bad decision process is based on shallow thinking. A good process is grounded in deep thinking and rethinking, enabling people to form and express independent opinions.
The deep thinking and rethinking that Adam Grant is talking about is taking all the factors into consideration and using mental models like probabilistic thinking, circle of competence, inversion, thought experiments, second-order thinking, considering opportunity cost, identifying incentives, and understanding how the problem is framed. Mental models can be useful on their own, but they’re much more effective when combined together. The impact of this is stark when used to make an important decision.
For example, probabilistic thinking in conjunction with spectral thinking helps us ascertain what outcomes are possible and the probabilities of each one occurring. The practice of combining probabilistic thinking with spectral thinking is a tactic that renowned investor Howard Marks employs to navigate the unknown future. In one of his memos, Marks specifically outlines his model of thinking about the future, saying:
. . . the future should not be viewed as a fixed outcome that’s destined to happen and capable of being predicted, but as a range of possibilities and, hopefully on the basis of insight into their respective likelihoods, as a probability distribution.
Using various mental models in conjunction with each other results in a strong decision-making process that leaves few gaps for failure. But even when failure does sneak through, following a detailed process like this provides solace. We know that we expended an appropriate amount of energy and used rational methods to make our decision.
Sometimes we are wrong. While painful, we can identify where we went wrong and then incorporate it into our decision-making process to help us make better decisions in the future. As long as we learn from our mistakes, they are useful. They strengthen our decision-making process over time. But other times we are right and the outcome just doesn’t match our rightness. Adam Grant writes about that as well in his Think Again book.
Even if the outcome of a decision is positive, it doesn’t necessarily qualify as a success. If the process was shallow, you were lucky. If the process was deep, you can count it as an improvement: you’ve discovered a better practice. If the outcome is negative, it’s a failure only if the decision process was shallow. If the result was negative but you evaluated the decision thoroughly, you’ve run a smart experiment.
Use a Margin of Safety When Making Decisions
Despite the effectiveness of leveraging mental models together, there are very few things guaranteed to work out all the time. It is because of this lack of definiteness that the decision-maker must seek a margin of safety. The less that is known, the greater the stakes, and the more uncertainty one has are all reasons to increase the margin of safety.
When assessing risks surrounding a decision we have to make, we can only assess the known risks. By definition, unknown risks are not known. How do we account for something we don’t even know about? By applying a margin of safety. The world is full of unknowns. Therefore, a margin of safety is crucial to navigating it.
Room for error does more than just widen the target around what you think might happen. It also helps protect you from things you’d never imagine, which can be the most troublesome events we face.
The Psychology of Money, by Morgan Housel
Considering Counterfactuals When Making Decisions
Counterfactuals are a rather abstract concept that considers what could or could not be, not what actually is. This is useful when determining what potentialities exist.
An article in Nautilus delves into the universe of counterfactuals, using a hypothetical space exploration example to illustrate a use of a counterfactual. Suppose a future space mission visits a remote planet in a distant solar system and leaves William Blake’s poems there. It would then be a factual statement to say that Blake’s poems are on that planet. It would be a counterfactual statement to say the poems on that planet could be read.
Bringing it back to Earth, let’s use counterfactuals with the Titanic. Prior to its fateful voyage across the Atlantic, it was a fact that the ship could float. It was a counterfactual property that the Titanic could sink. This counterfactual property was ignored to the detriment of the ship and many of its passengers. Had the captain and crew accepted the idea that the novel ship, despite its compartmentalized design, could in fact sink, maybe the outcome of the Titanic would be different. Instead, now it’s a factual property that the Titanic sank.
Conclusion
Decisions are complex in nature and require much deliberation. Judging a decision by its outcome alone is limiting and sometimes misleading. But doing just that is simple, so many of us default to that mode. Instead, we need to evaluate the amount and quality of information available, the time constraints, and the systems used to synthesize the situation into action.
Good decisions can yield bad outcomes and vice-versa. Our world is full of randomness, which clouds our ability to most efficiently learn from what we do. Instead, we must wade through the noisy feedback we receive from others and our environment to calibrate and recalibrate what we know to be true and effective.
By creating a robust decision-making process, we then possess a system we can rely on to help us make more good decisions over time. It also supports us when the outcome falls in the suboptimal realm because we are more able to realize where we went wrong (if we did) or that luck worked against us. Either way, we can improve our process or take comfort in knowing that despite our best efforts, some things are outside of our control. Ultimately, a strong decision-making process will yield more optimal outcomes over the long term than poor outcomes. That’s what separates the good decision-makers from the bad.
The quality of decision is like the well-timed swoop of a falcon which enables it to strike and destroy its victim.
The Art of War, by Sun Tzu
