The Ultimate Guide to Making Smart Decisions
Education doesn’t prepare you for the real world. At least, it didn’t prepare me. I was two weeks into my job at an intelligence agency on September 11, 2001 when the world suddenly changed.
The job I had been hired to do was no longer the one that was needed. I had a computer science degree; I came from a world of 1s and 0s, not people, families, and interpersonal dynamics. I was thrust into a series of promotions for which I had received no guidance, that came with responsibilities I had no idea how to navigate. Now I found that my decisions affected not only my employees but their families. Not only my country, but other countries. The only problem? I had no idea how to make decisions. I only knew I had an obligation to make the best decisions I could.
To improve my ability to make decisions, I looked around and found some mentors. I watched them carefully and learned from them. I read everything I could about making decisions. I even took some time off work to go back to school and earn my MBA, hoping that I would finally learn how to make better decisions, as if that was some end state rather than a constantly evolving journey.
My belief that the MBA program was a good use of my time was eroded fairly quickly. When I showed up to write an exam only to find out it was open book test I realized my expectations were entirely wrong and in need of updating. Was I in a master’s program or grade school? Some days, I couldn’t tell. And yet that is where everything changed for me.
I stopped paying attention to the classroom and started learning from the best people I could find. I went from theoretical examples that were completely divorced from the real world to the wisdom behind the achievements one of the most successful businesses of all time. What I discovered in Warren Buffett and Charlie Munger opened a door that has never shut.
Munger has a way of thinking through problems using what he calls a broad latticework of mental models. These are chunks of knowledge from different disciplines that can be simplified and applied to better understand the world. The way he describes it, they help identify what information is relevant in any given situation, and the most reasonable parameters to work in. His track record shows that this doesn’t just make sense in theory but is devastatingly useful in practice. The last eight years of my life have been devoted to identifying and learning the mental models that have the greatest positive impact and trying to understand how we think, how we update, how we learn, and how we can make better decisions.
In life and business, the person with the fewest blind spots wins. Removing blind spots means we see, interact with, and move closer to understanding reality. We think better. And thinking better is about finding simple processes that help us work through problems from multiple dimensions and perspectives, allowing us to better choose solutions that fit what matters to us. The skill for finding the right solutions for the right problems is one form of wisdom.
This website is about the pursuit of that wisdom, the pursuit of uncovering how things work, the pursuit of going to bed smarter than when we woke up.
Decisions based on improved understanding will be better than ones based on ignorance. While we can’t predict which problems will inevitably crop up in life, we can learn time-tested ideas that help us prepare for whatever the world throws at us.
Think about the state of your life, your career, your business, your major relationships — anything consequential to you.
How many truly important decisions have you already had to make, and with the benefit of hindsight, how well did you make them? How many decisions did you make today? How many of them were great?
The types of decisions we face vary considerably. Most of those decisions, like where to grab a sandwich today, are unimportant. The consequences usually don’t matter. Yet some decisions are critical — they change our lives. We must make very personal choices about whom to trust, how to live, what to buy, and whom to marry.
A few major decisions determine a good portion of how our lives, careers, and relationships turn out. The outcomes of these decision points will reverberate for years, yet not many of us can say that we’re fully equipped to make the most of those choices.
Even small decisions can matter as they accumulate. Consider where to eat, one of a number of seemingly small and insignificant decisions we make daily. Over a small period of time, say a week or even a month, these decisions affect us little. However, as the months turn into years and compounding kicks in, we develop a pot-belly as the true consequences of a long series of poor decisions reverberate. That’s why many of the smartest people I know try to make as few decisions as possible. They go to the same restaurants every day. They eat the same meals. They wear the same clothes. They reduce the trivial choices in their lives so they can focus on making their essential choices well. They know that they are the sum of their decisions — and they want to make the right decisions at every juncture.
Within our jobs, especially in a knowledge economy, further decisions are required: we decide whether to take a promotion or not, which projects to invest in, whether to acquire a company or lay people off. Decisions shape our lives. They affect others. They write our legacies and ripple through history.
“I regard it as a criminal waste of time to go through the slow and painful ordeal of ascertaining things for one’s self if these same things have already been ascertained and made available by others.”
The problem is that even really smart people are awful at making decisions and aligning with how the world actually works. And this has always been so. Think about decisions like these:
- Napoleon deciding to invade Russia (and Hitler doing it again 130 years later)
- George Bush deciding to invade Iraq
- An editor deciding to publish O.J Simpson’s If I Did It
- Chris Webber choosing the timeout he didn’t have in the 1993 Final Four
- NASA’s decision to ignore the O-ring issues on the Challenger
- Pete Carroll deciding to run a passing play on the one-yard line in the Super Bowl
- President Kennedy’s famous blunder to continue the Bay of Pigs operation inherited from the previous administration (a mistake he quickly learned from)
- Margaret Thatcher deciding to get behind a “poll tax” that led to her ouster by her own party
- Juergen Schrempp, the CEO of Daimler-Benz, deciding to merge with Chrysler despite massive internal opposition and a general history of big M&A deals working very poorly
- Jim Cramer looking at Bear Stearns in 2007 and calling it a “BUY”
- …and a hundred thousand more…
These were catastrophic decisions made by people who were, in some sense, professional decision-makers. They had impeccable credentials and judgment, and yet they made poor decisions due to poor judgment or too-limited mental representations of the world.
Why We Make Poor Decisions
There are lots of reasons we make poor decisions. Let’s take a look at three of the biggest ones.
1. We’re not as rational as we think. I like to think that I’m rational and capable of interpreting information in a non-biased way. Only I’m not. At least not always. We’re all irrational to some extent. Sometimes we fool ourselves.
2. We’re not prepared. We don’t understand the invariant ideas — the mental models — of how the world really works. Mental models help us make sense of what we see happening and give us different lenses through which to view the problems we need to solve.
3. We don’t gather the information we need. We make decisions based on our “guts” in complex domains that require serious work to gather all the needed data. We land on easy solutions that sound about right but aren’t.
“The frog in the well knows nothing of the mighty ocean.”
Intelligent Preparation: The World Is Multidisciplinary
We live in a society that demands specialization. Being the best means being an expert in something. Letters after your name and decades in the trenches of experience are required before you can claim to know anything. In one sense there is nothing wrong with this — specialized knowledge is required to solve problems and advance our global potential. But a byproduct of this niche focus is that it narrows the ways we think we can apply our knowledge without being called a fraud.
So we think physicists can’t teach us about love; mathematicians can’t instruct us on how to run a business; poets don’t know squat about “my life.” And bloggers can’t contribute to philosophy.
I don’t believe this is true.
Knowledge is hard to come by.
It takes work and commitment, and I think we owe it to ourselves to take it out of the box it comes in and experiment with it. We should blow past conformity and apply all the knowledge at our disposal to the problems and challenges we face every day.
Think about it. Over time you’ve picked up a lot of fundamentals about how the world works. You may have read a book about the Manhattan Project and the building of the nuclear bomb that was launched at Hiroshima. This story conveys the awesome power of self-sustaining nuclear reactions. Have you ever thought about applying those ideas to your life? You should.
How We Decide
When was the last time you thought about how you decide?
If you’re like most people, you’ve never been explicitly taught how to make effective decisions. You make decisions like a golfer who never took any lessons: miserable with the state of your game and yet not seeking to learn a better swing, and instead hoping for the best every time you lift the club. Hoping that this time your choice will finally work out.
In the early 1980s, Charlie Munger and his partner Warren Buffett realized that a Savings & Loan operation they owned, as with the rest of the industry, was doomed to fail miserably due to forces outside of their control. At a time when almost none of their peers were taking action, they changed course dramatically, massively reducing the effect of the bank’s failure on the rest of their business holdings. These two men knew they had to act much differently than their peers.
It worked: The S&L industry collapsed, yet Munger and Buffett escaped with barely a scratch. They saved themselves a great deal of stress and financial pain by applying a uniquely effective system of organized common sense. In hindsight, it seems like an obvious good decision; at the time, it seemed odd and unusual.
The lesson for us is that the people making consistently good decisions take advantage of how the world works. That’s wisdom.
Real knowledge of the art of decision making, which remains true across time and circumstances, eras and epochs, can help increase the odds that we get what we want and reduce costly mistakes.
While everyone else is guessing, falling into old patterns, blindly following cognitive biases, we can be clear-headed and laser focused.
That’s what Farnam Street is all about.
Here are some examples of applying — or failing to apply — knowledge about how the world really works.
- It doesn’t matter how smart you are if you don’t realize where things are additive and where they are multiplicative. Nikola Tesla failed to understand Multiplication by Zero when he failed to realize that poor relations with others affected his life. While the Serbian-American was a brilliant inventor, he had difficulty relating to others, which made him difficult to work with. This problem cost him a Nobel Prize and a fortune that today would likely have made him the richest man in the world.
- While we all rely on maps, which are reductions of complexity, to make decisions, they are not always accurate. General George S. Patton Jr. understood that the map is not the territory. When he visited the troops near Coutances, he found them sitting on the side of the road, studying a map. Responding to Patton’s inquiry as to why they had not crossed the Seine, the troops informed him that they were studying the map and could not find a safe place to wade across. Patton informed them that he had just waded across it and it was not more than two feet deep.
- While we all like to be in the sexy industries, that desire shows an under-appreciation for the laws of thermodynamics. Smart companies like Berkshire Hathaway, guided by legendary investor Warren Buffett, understand that contrast is important. Sexy internet businesses are rarely effective, no matter how good they are, because the others are nearly just as good. What you want is contrast — to be the big fish in a small pond. And when you analyze the types of investments he’s made over the years, that’s what you find. If you’re going to compete with people, you want to compete with people who are way less sophisticated than you.
- Understanding and applying the mental model of relativity helped Michael Abrashoff take the worst-performing ship in the US Pacific Fleet and turn it into the best. In his book, It’s Your Ship, he wrote: “The most important skill a skipper can have is the ability to see through the eyes of the crew.”
This website is about understanding and applying these time-tested mental models. Knowing how the world works means that you can stop fighting reality — and yourself along with it.
The Top General Thinking Concepts
Combining intelligent preparation — learning about the big time-tested ideas from multiple disciplines — with general thinking frameworks will dramatically improve your decision-making skills. These thinking frameworks help you look at problems through different lenses. We’ve compiled a list of ten of them, but here are the top three:
- Inversion — Otherwise known as thinking something through in reverse or thinking “backwards,” inversion is a problem-solving technique.
- Second-Order Thinking — Ask yourself, “And then what?”
- The Map Is Not the Territory —The map of reality is not reality itself. If any map were to represent its actual territory with perfect fidelity, it would be the size of the territory itself.
The Top Articles on Decision Making
- How to Learn How To Think — An argument to spend more time thinking.
- The Anatomy of a Decision: An Introduction to Decision Making — A structured process to walk through decisions.
- Use a Decision Journal (Example Template) — One reason we struggle to get better at making decisions is that we rarely receive feedback on the quality of our decisions.
- A Two-Step Process to Improve Your Thinking — How the smartest people decide.
- The Science of Hitting — Ted Williams, one of the best hitters in baseball, knew a lot about making effective decisions.
- An Ancient Lesson on Taking Responsibility for Decisions — “A decision is responsible,” wrote Charles Frankel, “when the man or group that makes it has to answer for it to those who are directly or indirectly affected by it.”
- When someone says “this time is different,” think very carefully.
- If you don’t have deep fluency, you’re in trouble. It’s hard to make decisions based on shallow knowledge.
- The Three Filters Needed to Think About Problems — Three filters that help us intrepret reality.
- How People Make Big Decisions — We all go through psychological steps when we make big decisions.
- Make sure you can answer the next question.
- Avoiding Stupidity Is Easier than Seeking Brilliance — If you’re an amateur, your focus should be on avoiding stupidity.
- Keeping Things Simple and Tuning Out Folly — William James said, “The art of being wise is the art of knowing what to overlook.” No truer words have been spoken.
- Your Environment Matters If You Want to Make Better Decisions — It’s hard to make rational decisions the way most of us work.
- What Matters More in Decisions: Analysis or Process? — “Our research indicates that, contrary to what one might assume, good analysis in the hands of managers who have good judgment won’t naturally yield good decisions.”
- What happens when decisions go wrong? — “When a decision goes awry, we tend to focus on the people who made it, rather than on the decision itself. Our assumption, which is really unwarranted, is that good people make good decisions, and vice versa.”
The Best Decision Making Books
We compiled a list of 39 of the most helpful books on decision making. Here are some of my go-to recommendations:
- Judgment and Managerial Decision Making — An academic book that effectively covers heuristics and biases (i.e., how we fool ourselves.) For a non-academic book on the same subject, see Thinking, Fast and Slow by Daniel Kahneman.
- Poor Charlies Almanack and Seeking Wisdom — These books cover most of the ways we fool ourselves but add a layer of applied multidisciplinary education.
All Articles on Decision Making
Here’s the big list of every article we’ve written on decision making.