One of the most confounding conundrums investors face is the prospect of experiencing bad outcomes after making good decisions. This sometimes happens because choices about the future always contain an element of uncertainty. Despite our confidence (or overconfidence) in making these decisions, we don’t (and can’t) know all of the information relating to the decision. The subtitle of poker champion Annie Duke’s book, Thinking in Bets, is “Making Smarter Decisions When You Don’t Have All the Facts.” This aptly reminds us of the vulnerability of believing we have complete information when we really don’t.
We advise clients that inputs influence outcomes, but there is always the spectrum of bad luck. The quality of decisions on the continuum ranging from very poor to outstanding of course matters. The real problem, however, is that we learn lessons from our decisions and often these lessons further compound our already deeply rooted cognitive biases.
If we make poor decisions that eventually result in good outcomes, this becomes a process we try to repeat, even though random luck was at play. Conversely, if we make good decisions that don’t produce the desired results, we believe something was wrong with the initial decision.
Errant beliefs built upon a small sample of decisions become very difficult to dislodge from our brains. This is often a huge, yet largely unrecognized obstacle for many investors as they go about trying to plan for the future.
The truth is, the relationship between decision quality and outcomes isn’t overly tight. Just like a basketball player attempting a shot, sometimes the ball rims out even though the shot was within the high percentage range.
Hidden information, incomplete information, and randomness all have a role to play in the ultimate outcome. Our inherent overconfidence fights this notion but it remains true nonetheless.
Don’t Drift Off Course
I find that perhaps more than anything, clients search for certainty and often drift way off course in hopes of finding this elusive state of being. Our counsel is to avoid the illusion of certainty and focus instead on elements that you actually can control. These include your overarching planning objectives and the saving/investing inputs that form the backbone of your financial life goals.
Initial decision quality is important no doubt, but making adjustments to these decisions along the way may be even more important. The financial planning process can be the missing link to good outcomes. Start there. Ready for a real conversation?