Make Smart(er) Decisions And Avoid Bad Ones

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 disappeared. 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. Suddenly, 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 eroded 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. Some days, I couldn’t tell whether I was in a master’s program or grade school? And yet that is where everything changed for me.

Thanks to the internet, I was no longer limited to the best teachers in my organization or university. I went from theoretical classroom examples that were completely divorced from the real world to the wisdom behind the achievements of one of the most successful businesses of all time. What I discovered in Warren Buffett and his longtime business partner Charles Munger opened a door that has never shut.

(c) 2018 Farnam Street Media Inc. All rights reserved. May not be used without written permission.

“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

Mental Models

Munger thinks through problems using a broad latticework of mental models.

Mental models explain how things work. They are “mental” chunks of knowledge that represent a concept. Gravity is a mental model. So is probabilistic thinking, inversion, and entropy.

Mental models shape how you think. They help identify relevant variables, how those variables interact with one another, and what’s likely to happen in the future. Mental models shape the way we approach problems, what we see, and what we ignore. They are the basis of pattern matching and help us predict the future.

Mental models are the relevant and quickly available information that we bring to a problem that makes us seem like an expert. When we don’t have the right models, we pay a heavy price.

We all have blind spots when approaching a problem or decision. And yet, the person with the fewest blind spots wins. Our goal is to reduce our blindspots, which allows us to see more of reality.

Mental models are your tools and thinking better is a matter of having the right took for the job. When you have the right tools you can walk around a problem from multiple dimensions. You can’t make consistently good decisions if you have blind spots.

Farnam Street is about giving us the right mental tools for the job. Our goal is to go to bed smarter than when we woke up. We want to understand the big, time-tested, ideas from the big disciplines and learn how to to apply them to our problems.

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 tools to make 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

Even smart people are awful at making decisions. 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
  • 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, a too-limited mental representations of the world, or just plain stupidity.

Sources of Stupidity

There are a lot of reasons we fail to make the best decision possible at the time.

Let’s take a look at five of the biggest ones:

1. We’re unintentionally stupid. I like to think that I’m rational and capable of interpreting all information in a non-biased way but that’s a dream. Cognitive biases are great at explaining how our evolutionary programming leads us astray. But knowledge of these biases in advance rarely helps us make better decisions. There are, however, many easily recognizable situations that increase the odds we’re about to do something stupid. Whether we’re tired, overly focused on a goal, rushing, distracted, operating in a group, or under the influence of a group, we’re more prone to stupidity. 2.

2. We have the wrong information. Making decisions with the wrong assumptions or facts is likely to lead to disaster.

3. We use the wrong model. We use mental models to make decisions. The quality of those models often determines the quality of our thinking. There are a variety of reasons that we use false, incomplete, or incorrect mental models. Novices are prone to using models that the expert knows are incomplete or irrelevant. The odds of the wrong, or out-dated, model also increase as the pace of environmental change increases.

4. We fail to learn. We all know the person that has 20 years of experience but it’s really the same year over and over. Well, that person is sometimes us. If we don’t understand how we learn, we’re likely to make the same mistakes over and over.

5. Looking over doing good. Our evolutionary programming conditions us to do what’s easy over what’s right. We unconsciously make choices based on optics, politics, and defendability. We hate criticism and seek the validation of our peers and superiors.

Luckily, we can take steps to reduce the odds of stupidity and increase the odds of good decisions in each of these categories.

“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 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

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:

All Articles on Decision Making

Here’s the big list of every article we’ve written on decision making.

 

Endnotes:

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