There are two approaches to complex decision-making that you should avoid at all costs.
Ignore Your Gut and Avoid Spreadsheets
The first is gut-feeling. Gut feelings serve us well for low-level, instantaneous decisions which are almost unconscious. Should I drive around the barrier and go across the level crossing even though I can hear the train coming? This doesn’t require thought.
These kind of self-preservation decisions stem from our amygdala, or lizard brain, called ‘System 1 Thinking’ in Daniel Kahneman’s excellent book “Thinking, Fast and Slow”.
This is the realm of fight or flight decisions, and should not be used to approach complex decisions which affect our long-term future. If you think it feels wrong to invest in a certain fund, you’re making the decision the wrong way – feeling has nothing to do with it.
Our caveman ancestors didn’t have the complexity of decisions that we’re talking about here and that part of our brain is still ill-suited to modern life.
The other decision-making strategy we should avoid is the spreadsheet approach. Making decisions around our financial future might appear to lend themselves to a spreadsheet, but in doing so we’re in grave danger of removing our humanity altogether.
Distilling a massive decision such as whether to move cities for a new job opportunity or our choice of life partner down to columns and rows and PivotTables is madness. Some things just can’t be that precise. MOST things can’t be that precise!
We humans have survived and thrived for so long because we have great intuition, and spreadsheet decision-making removes that entirely. So we need to avoid System 1 Thinking – using our gut – and also we need to avoid taking our humanity out of the equation altogether by reducing the decisions to numbers and formulae. How then do we make a complex decision?
Reduce Dimensions
Many (most?) decisions are multi-dimensional. At least, they appear to be at first glance. If I retire early, what will be the impact on my savings and pensions? Will I need to take my DB scheme early?
How will this impact on the pension I get? Will this mean I pay a Lifetime Allowance charge sooner rather than later? What about my partner and his or her work patterns? Or…
If I change my job, what are the financial implications now? What about the long-term implications on my savings rate and pension contributions? What if I’m made redundant – I’ll have shorter service with the new company and hence a lower payoff? Do I need to tell my income protection insurer?
You can take pretty much any decision and project it forward so that there ends up being a million facets to it, and that makes the decision impossible to make.
In reality, those further-down-the-line factors can be addressed when we get to them and don’t necessarily need to be directly impacted by the immediate decision we need to make. While many things could happen as a result of this imminent decision, they may not, and probably the relationship is not directly causal.
Rather than extending this current decision beyond its logical reach, can we reduce the factors or dimensions of the decision? Or can we decide not to sweat all the dimensions of a decision and instead only consider those we place the most value on?
Can we identify what the dimensions of the decision are and give them appropriate weight, so we’re only thinking about the big ones, and ignoring the lesser dimensions. Can we identify dimensions that must be considered, those that are of lesser importance and those we can safely ignore completely?
As I say that, I can see how this might seem like a lot of work, but this is a powerful approach to decision-making that we should bear in mind. Reducing the dimensions of a decision will make it easier.
