From Bad Choices to Great Decisions: Master the Art of Decision Making

Learn from Your Past Decisions with a Decision Journal

May 11, 2024

In both business and everyday life, the ability to make good decisions is crucial. It sets you apart from others and can greatly impact your success.

Decision-making is everything. In fact, someone who makes decisions right 80 percent of the time instead of 70 percent of the time will be valued and compensated in the market hundreds of times more. - Naval Ravikant is an American entrepreneur, investor

However, decision-making is not often taught in school, leaving many of us without the necessary skills to navigate through complex choices.

This article will give you a simple and effective way to enhance your decision-making skills using a decision journal.

Charlie Munger's Inversion Technique:

Charlie Munger Warren Buffett's business partner and the Vice Chairman of Berkshire Hathaway, has a famous approach for solving problems called inversion.

Munger's guiding principle is “Invert, always invert”.

This means that instead of focusing on your desired outcome, you should consider the opposite to identify the path that leads to undesirable outcomes.

To put it simply, if you want to make good decisions, stop making bad decisions.

How do you stop making bad decisions?

It's important to learn from our past decisions to avoid making bad ones.

Here's what you can do:

Review the decisions you've made in the past.
If you notice any bad decisions, identify the factors that led to those choices and make an effort to avoid them.
Repeat this process.

Seems simple, right? Unfortunately, our ability to learn from past decisions is often hindered by cognitive biases.

In the book How to decide : Simple Tools for Making Better Choices , author Annie Duke, discusses several cognitive biases.

I will share two examples here

The Tale of Two Colleagues

John and Jane were both skilled software engineers at a big tech company. They worked together on the same team, but faced a significant problem - their manager, Mike, was hard to work with. He was very critical and made the work environment stressful.

John's Decision to Move

One day, John found out that his previous manager, David, who he had really enjoyed working with before, was hiring for his team. David was known for being a great people manager and creating a positive work environment. John saw this as a chance to get away from Mike's management.

John joined David's team, excited to work under his leadership again. However, soon after joining the new team, there was a big reorganization at the company. David ended up managing another team and John got a new manager who he had never worked with before and didn't know much about.

Jane's Decision to Stay

Jane made the decision to stay on Mike's team even though he wasn't a good manager. She liked the challenging technical work and thought she could handle working with Mike because everything else was good.

Soon after John left, Mike unexpectedly left the company for another job. Jane's new manager was Tom, who turned out to be a great leader.

Think about it for a moment. Whose decision was better? John's or Jane's?

The Outcome Bias

Looking back at John and Jane's decisions, it's easy to judge them based on how things turned out:

John's choice to leave Mike's team for David's seems like a poor decision. He ended up with a manager he knew nothing about and lost the positive situation he had hoped for.

In contrast, Jane's decision to stay put despite the difficulties with Mike now looks brilliant. She stuck it out and was rewarded with an ideal manager, Tom, while still enjoying her work.

However, this way of thinking shows the outcome bias

Outcome bias is Judging the quality of a decision based on the end result, rather than considering the information and reasoning that went into making the decision at that time.

When John decided to switch teams, he thought it was reasonable because he trusted David as a manager. His decision made sense since his goal was to escape Mike's poor leadership.

Similarly, Jane's choice to stay was logical because she prioritized keeping her enjoyable work, even if it meant dealing with a difficult manager.

The eventual outcomes were unpredictable for both John and Jane. Judging their decisions solely based on those outcomes is an example of outcome bias - an unfair assessment that doesn't consider the information and logic they used when making their decisions. Luck also played a role.

Ready for another story?

The investing conundrum

In 2018, Sarah was considering investing in a condo in the up-and-coming neighborhood of Westville. Her friend Jenna had recently purchased a modern one-bedroom condo there for $300,000.

Jenna excitedly told Sarah, "Westville is going to be the next hot area! With all the new restaurants and shops moving in, prices are only going to go up!"

Sarah was tempted but unsure about making such a big investment. The condo prices seemed high for the area. After thinking about it for months, she ultimately decided not to buy because she thought it was too risky.

Fast forward to 2024. Westville had indeed become very popular, and condo prices now averaged $500,000 for a modest one-bedroom. Sarah regretted not listening to Jenna and getting in early.

"I should have realized that Westville would become so popular," Sarah lamented.

Now let's consider the same situation where Sarah didn't invest, but the outcome is different.

Fast forward to 2024. While Westville had seen some new development, it didn't become as popular as Jenna predicted. Condo prices increased, but only to around $375,000 for a comparable one-bedroom.

"Phew! I'm glad I trusted my instincts and didn't overpay in Westville," Sarah thought proudly.

Same decision, opposite outcomes. In both cases, Sarah chose not to invest.

Sarah was falling victim to hindsight bias

The hindsight bias

When you make a decision, there are things you know and things you don't know. One thing you definitely don't know is which outcome will actually happen among all the possibilities.

But afterwards, once you know what actually happened, you might feel like you should have known it all along. The actual outcome affects your memory of what you knew at the time of making the decision.

Outcome bias makes you think that you know whether a decision was good or bad based on the outcome.

Hindsight bias adds to the confusion caused by knowing the outcome, distorting your memory of what you knew when making the decision.

Hindsight bias is the tendency to believe that an event was predictable or inevitable after it occurs.

How can we avoid such biases in analyzing decisions?

Discover the Power of a Decision Journal

A decision journal can help you avoid biases when analyzing the quality of decisions. It is a written record of how you make decisions. It allows you to think about your choices, find any biases, and learn from what happened before.

You don't need to write down every decision you make. Just the important ones should be recorded.

You can use decision journal template below that I adapted from Farnam Street Blog and How to Decide book

Write down the following before making the decision:

The Situation or Context: Describe the circumstances surrounding the decision.
The Problem Statement or Frame: Clearly define the problem or challenge you are facing.
Things You Know Before Making the Decision: List your knowledge, uncertainties and assumptions prior to making the decision.
Alternatives Considered: List alternative options you seriously considered and explain why they were not chosen.
Expected Outcome and Probabilities: Explain what you expect to happen and assign probabilities to each projected outcome.
Time of Decision and Mental State: Note the time of day when making the decision and how you feel physically and mentally.

Update your decision journal a few months later :

Outcome: Record the actual outcome of the decision.
Things You Know After Making the Decision: Reflect on what you have learned from the decision-making process.
Luck Factor: Identify any elements of luck or external factors that influenced the outcome.

Regularly review your decision journal

A decision journal is helpful only if you review it. Take it off the shelf every six months or so and look at your past decisions. Update the entries with what actually happened and spend time thinking about how you made those decisions.

By realizing where and how you make mistakes, what types of decisions you struggle with, and so on, you can improve your decision-making skills. When you start noticing patterns, you can adjust your decision-making process to address any overlooked factors.

Start using a decision journal to navigate complex choices with more confidence and increase your chances of success.