They let me pick, did I ever tell you that? – How to Decide

One of the aspects of FIRE that people find most difficult is deciding how to go about it.  Although the broad concepts are very easy to understand, there are a lot of decisions that need to be made to actually make a start.

Unfortunately although we get taught a lot of things in school and university for those who go on to further study, I do not recall being taught much if anything about how to make decisions either during my formal education or thereafter.   

Some of the various jobs I’ve had over the years have taught me a little bit more about this, but almost always just in the context of that particular job rather than for broader application.

And in my personal life, I can’t say that there’s really been much discussion of how to make decisions either, certainly it wasn’t something that came up around the dinner table when I was a kid.

Because of this a lot of the decisions I’ve made over the years probably haven’t been as good as I might have liked.  In fact some of them have been absolutely terrible, although thankfully in almost all these cases the stakes were very small and the outcome didn’t have much effect on my life.

So how do we make better decisions?

Two books which helped inspire this post were from Annie Duke, Thinking in Bets and How to Decide, both released in the last few years.  I also found this post provided a great visualisation of a shortcut method for figuring out which ones are the important decisions.  So a lot of this post is going to lean quite heavily on what I’ve read from these sources, and I would thoroughly recommend them to others as well.

Before I get started with writing about how to make those big decisions, there are a few other things to look at first.

Resulting

When we look back at some of our previous decisions, it’s quite common to judge the quality of the decision based on the outcome, also known as resulting.  Having a good outcome often means that we will think we made a good decision, and conversely if we have a bad outcome we think it was a bad decision.  But actually it’s not that simple, as well as good decisions that lead to good outcomes you can have good decisions that lead to bad outcomes.  Also bad decisions may usually lead to bad outcomes, but they may also end up with good outcomes.

As an example if someone was self employed, never contributed to super, never saved any money at all, and then just before they were due to retire solely on an age pension they won the lottery there are plenty of people who would tell you that they wouldn’t change a thing with how they’d lived all through their working life.  But pretty clearly the decision not to save anything for retirement was a bad one, they just happened to get lucky!  Bad decision, good outcome. 

Alternatively if you had done a great pursuing FIRE but then got struck by lightning the day before you were going to retire early, you made good decisions but had a bad outcome.  And obviously there are the good decision and outcome and bad decision and outcome scenarios of saving for early retirement and getting to enjoy it, or not saving at all for retirement and then leading a fairly tough existence in retirement.

As a less extreme example putting all your money into Tesla/Bitcoin/insert latest crypto joke coin might well have resulted in a great outcome, but it doesn’t mean it was a great decision, in particular if it was every last cent you had. 

We see resulting all the time in sports with commenters judging the decision making based on the outcome.  Win a game, the team made great decisions.  Lose a game, they made bad ones.  Luck is usually ignored, even if a team made good decisions but lost due to bad luck, like the bounce of a ball or a punctured tyre or a bad umpiring decision.

Luck

One of the realities of life is that luck can play a pretty important role.  There are lots of pithy sayings about making your own luck, or the harder you work the luckier you get, and those are true to some extent. 

Two of the best jobs I’ve ever had came about because of jobs I’d done previously and connections that I had made, so to an extent I made some of my own luck there.  But it could have also gone the other way, with someone else getting those jobs or other ones I had applied for because of them making their own luck.  In fact it’s likely the case that’s what happened with some of the other jobs that I missed out on where I was a great candidate but never even got a response.

Sports can be a great example of this, sadly there is always some poor sportsperson who was going to be the next big thing (or already was) and then suffers a career ending injury through no fault of their own.  And that person suffering an injury may lead to their understudy getting the chance to shine and go on to become a star themselves. 

But for almost any outcome, there is the potential for luck to be involved.

Thinking in Bets

For a lot of what we do in life, there are a range of possible outcomes.  We don’t always know what those outcomes will be, but we can usually at least have an educated guess.  Some outcomes are high probability, some are low probability, some are in between.  In the words of Elroy Dimson, risk means that more things can happen than will happen.

What sometimes happens though is that people think in absolutes.  Something is definitely going to happen or not happen at all.  Or someone might use a word which means one thing to them but something different to someone else.  Looking at the diagram below, to me “always” means 100% of the time, but to others it might only mean 90% of the time.  “Serious possibility” seems to be interpreted as being 50% or more, but to me that would actually mean less than 50%.  “Never” means 0% of the time to me, but means up to 10% of the time to others.

We’re also not good at understanding that even if something has a high probability of happening, that doesn’t mean it is guaranteed to happen.  A prime example of this was Hillary Clinton being given an 80% probability of winning the US Presidential election in 2016, but actually losing.  Big favourites get beaten, low probability outcomes do happen. 

If I invest in shares over the long term, it’s a pretty high probability that the value of my shares will increase over time.  But if I’d invested in US stocks in 2000 I actually ended up about where I started 10 years later.  If I invested in Japanese stocks in the late eighties it took an even longer time to get back to break even.  Boy oh boy but investing in the Greek stock market pre GFC has not worked out well for investors.  So investing in shares even over the long term doesn’t guarantee that the value of my investments will increase, although it is still highly probable that will be the case.

Dealbreakers

There are some things which are absolute dealbreakers for different people.  Some people absolutely refuse to borrow money after they’ve paid off their own home, which in Australia essentially rules out buying investment properties.  Other people absolutely cannot handle volatility, which essentially rules out owning shares.  I would certainly encourage people to examine why they have particular dealbreakers, if they should have them, and what impact it will have on them, but it’s a reality of life that they do exist.

Decision fatigue

Decision fatigue is when your decision making gets worse because you’ve tired mentally, often because you’ve already had to make a lot of decisions.  When we were building our house we had to make so many decisions about what the inside in particular would be like, and it all had to be done on one day.  Which tiles in the kitchen, which tiles in the bathroom, the laundry, the ensuite.  What colour for the walls, the architraves, what style, what this that and hundreds of different other things.  And for a lot of these things there isn’t a default, and you can’t just say I want it white, because there are what feels like 50 different shades of white.  It was absolutely exhausting mentally.

One way of combatting decision fatigue is to reduce the number of decisions you make each day.  Steve Jobs rather famously wore the same thing every day, and whilst this isn’t appropriate for everyone a lot of us got probably easily pare down our wardrobe to fewer items that all go together reasonably well. 

 Similarly with your breakfast, lunch etc, if you eat the same thing every day or have taken in your lunch, that’s one less decision that you have to make.  Take the same train, get the same coffee, have routines setup so you’re not constantly having to make small decisions which nevertheless tire you out mentally.

Alternatively if you have thought about at least some of your decisions in advance you don’t need to make a new decision because you already have the answer.  We did this with our house because we were able to visit the showroom in advance and choose at least some of what we liked in advance.

Last time we bought a car we had all the fun of the negotiations over price which is fairly stressful for a lot of people, and then once we were done with that and presumably a little mentally exhausted, they brought out another salesperson to try and upsell us on all the extras.  We already knew we didn’t want any of this stuff, but this is when you’re vulnerable to making bad decisions and I’m sure there are plenty of people who do make bad choices when it’s put in front of them like this. 

Similarly this is why you see a bunch of chocolate at the supermarket checkout, you’re potentially mentally tired already from having to make a bunch of decisions and calculations about which offer/brand/type etc of stuff you want to buy.  Which is where making your decision in advance comes in handy, ie no I am not going to buy that stuff, or having a list prepared in advance and only buying things that are on the list.

One way doors and two way doors

I could write a bunch about this but Jeff Bezos already covered it in his 2015 shareholder letter and I’m certainly not going to improve any on what he said.

Getting started on making big decisions

I love this flowchart from Lucky Maverick which I think does a fantastic job of breaking down a decision making process.  I don’t agree with it entirely and it doesn’t apply to every decision, but it’s going to be a huge improvement on what most people currently do and you shouldn’t let the perfect be the enemy of the good. 

In particular I would say that a decision may be easily reversible, but there may be costs for doing so.  And there are times that you might want to take into account some of the questions further down the flowchart, but in general it’s pretty good.

Let’s have a look at a few examples.  Something that constantly comes up in FIRE groups is which high interest savings account (for some version of high!) to use for an emergency fund.  There isn’t really a best long term option because the rates on all of these are variable over the long term.  Over the short term there is usually one account which offers the highest rate, in which case you should just use that.  Looking further through the flow chart we can confirm that this is a good decision, because the decision is also pretty easily reversible, it’s not actually very consequential if you do the math, putting in more time and effort won’t help you make a better choice or get a better outcome.  Job done, pick the highest interest rate at the moment.

I’ve written previously about which Aussie ETF to use but that was before looking into the decision making literature.  Nevertheless I think my article actually holds up well against this decision making process.  None of the other options are clearly better long term, because we don’t know what changes to fees may happen, or which index might perform better particularly given they’re very similar.  In the short term one is very slightly cheaper, but I wouldn’t say it’s clearly best.  The decision isn’t exactly easily reversible because there would likely be CGT on a share sale, but you could certainly switch which one you’re buying so in some sense it is?  Is the decision consequential, I would say no because when choosing between them it’s a tiny difference over the long term.  Can you make a better decision by putting in more time/effort, I would say no, in which case you can choose any of them.  Which is pretty much exactly what I wrote at the time.  *pats self on back*

Ok so what about that classic FIRE debate, property vs shares.  We don’t know what the performance of either asset class will be long term or short term, so we can skip through that.  The decision is not easily reversible in the case of buying a property at least and would definitely have some hefty costs, so we move on to whether the decision is consequential which it definitely is.  You probably can make a better choice by putting in more time/effort, and that difference is likely to be worth putting in that time effort.  So here’s a decision where you should be taking your time and choosing wisely. 

So how exactly do we do so?

Well, that’ll be the subject of my next post!

What’s your decision making process?  If you enjoyed this post and would like to read more like it then please subscribe!