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How to Make Smart Decisions Without Getting Lucky

Few things will change your trajectory in life or business as much as learning to make high-quality decisions. Yet, no one teaches us how to make consistently effective decisions.

I remember standing in a windowless room at a three-letter intelligence agency. Information was flowing across the screens. Some information said zig, and some said zag. What to do wasn’t clear, and the wrong choice would end up on the front page of most newspapers and put troops in peril.

“Shane…. we need a decision.”

The problem? I was 24. No one had taught me how to make decisions, let alone choices like this. There was no one else around. I could feel my heart beating faster and faster.

I started working at an intelligence agency on August 28, 2001. Two weeks later, the world changed. If you were in the building, you did what you needed to do. No one complained. We all just wanted to do our part.

If no one would teach me how to make decisions, I’d have to teach myself.

There is no class called “practical decision-making.” Making better decisions isn’t one skill but a series of tools, behaviors, and frameworks (see decision by design).

What distinguishes consistently good decision-makers from poor ones is an ability to position yourself, understand the circumstances, and think.

Even a genius looks like an idiot when circumstances force them to make a poor decision. The converse is also true. An average person can look like a genius when they position themselves to take advantage of circumstances.

Aside from positioning, the key is learning to think through a problem using mental models. Mental models are important because they change our perspective and reduce our blind spots.

“The older I get the more I realize how many kinds of smart there are. There are a lot of kinds of smart. There are a lot of kinds of stupid, too.”
— JeFF Bezos

To learn how to make decisions, I found some mentors around my organization. I watched them, asked them annoying questions, and tried to learn as much as possible from them. I did an MBA. I read everything I could about making decisions. And thanks to the internet, I was no longer limited to the best teachers in my organization or university. The entire world was available. I could find the best teachers in the world, learn their tools and frameworks, and add them to my mental toolbox.

You’d be amazed at who replies when you tell them you work for an intelligence agency and you think they might be able to help you save lives.

Pattern Matching

You probably don’t know it but you already think in mental models.

A mental model is a compression of how something works. Mental models help us understand the world. For example, velocity is a mental model that teaches both speed and direction matter. Reciprocity is a mental model that shows why going positive and going first puts the world on your side. Relativity is a mental model that shows us we have blind spots and how a different perspective can reveal new information. The list goes on.

The models in your head shape how you think, approach problems, and identify the information that matters and ignore what doesn’t.

Decision Making

Think about the state of your life, your career, your business, your major relationships — anything consequential to you.

How many important decisions have you already had to make? With the benefit of hindsight, how well did you make them?

How many decisions did you make today? How did you make these decisions? Is there a better way?

Not all decisions matter. Most decisions, like where to grab a sandwich, are unimportant. The consequences of these decisions don’t matter.

Yet some decisions are critical — they change our lives. Whether its who to trust, where to live, or whom to marry, these decisions reverberate for years.

Yet most of us don’t have the right skills to think through these problems. As a result, we often fall back to the pro-con list, where you list all the positive things that happen on one side and the negative things on the other trading them off.

While useful when deciding what to have for lunch, the pro-con list comes with a lot of blind spots.

“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.”
— Thomas Edison

SMART People Make Terrible Decisions

Otherwise intelligent people can make terrible decisions. Think about decisions like these:

Napoleon decided to invade Russia (and Hitler did it again 130 years later)
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
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 general history of big M&A deals working very poorly
…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, a too-limited mental representations of the world, or just plain stupidity.

“The frog in the well knows nothing of the mighty ocean.”
— Japanese Proverb

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 Make Decisions

When was the last time you thought about how you make decisions?

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.

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.

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.

All of these concepts (and six others) can be found in The Great Mental Models Volume 1: General Thinking Concepts.

Add to your Decision-Making Skills

How Not to Be Stupid — Stupidity is overlooking or dismissing conspicuously crucial information. Here are seven situational factors that compromise your cognitive ability and result in increased odds of stupidity.
The Decision Matrix: How to Prioritize What Matters — The decision matrix is a powerful tool to help you prioritize which decisions deserve your attention as a leader, and which should be delegated. Here’s how you can start using it today.
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 interpret 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.”

Books to Improve Decisions

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.
The Great Mental Models Volume 1: General Thinking Concepts — This volume details nine of the most versatile, all-purpose mental models you can use right away to improve your decision-making, productivity, and how clearly you see the world.

Endnotes:

¹ paraphrased from my friend Peter Kaufmann.
² See the work of Adam Robinson.

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