The Better Letter: Say What?! (Part 6)
Make Fewer Decisions
This week brings the sixth installment of my series on making behavioral finance actionable. The previous five are linked below.
In this missive, I’ll begin to outline some techniques for making better decisions.
Before I do that, I want to note that overcoming our biases is a spiritual quest of sorts. Christianity demands that we recognize what kind of people we are (sinners), what kind of people we aspire to be, and that we can’t become who we want to be on our own. Overcoming bias follows a similar path.
As C.S. Lewis wrote in The Magician's Nephew, “What you see and what you hear depends a great deal on where you are standing. It also depends on what sort of person you are.” It’s related to Miles’ Law: “Where you stand depends on where you sit.”
The “sort of person you are” part speaks to integrity — wanting to do and be right for the right reasons, while owning up to one’s faults as honestly as possible.
As James Baldwin wrote, “Not everything that is faced can be changed; but nothing can be changed until it is faced.”
None of us is comfortable about being shown wrong. We tend to deny error and interpret the apparent problem away. As Dylan sang: “People seldom do what they believe in. They do what is convenient, then repent.”
They (we) also focus on what makes us look good over what makes us good … or, at least, a little less rotten. May we fight to be right rather than seem right.
So, let’s see what we can do to try to help us do better and be better.
Dylan again: “Gonna change my way of thinking, make myself a different set of rules. Gonna put my good foot forward and stop being influenced by fools.”
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Thanks for reading.
Make Fewer Decisions
It’s simple math.
Since our decision-making is innately flawed and prone to error (on account of both bias and noise1), the easiest way to improve it is to make fewer decisions. I’m not talking about procrastination, although doing so often helps. I mean, literally, make fewer decisions.
By some estimates, we make something like 35,000 decisions a day. That’s lots of opportunity for error. We’re subject to decision fatigue, too.
One obvious good is to automate whatever you can — paying bills, investments, shopping, etc. Schedule regular important tasks, like exercise, so that you’re more likely to do it (and less likely to decide to blow it off). I have a reading routine I follow so I have fewer choices to make about what to pay attention to and am less likely to fall down some rabbit hole. I use lists and GPS.
For more important matters, a decision matrix is a good idea. Turn off notifications. Check email only at set times. Choose your clothes the night before.
“You’ll see I wear only grey or blue suits,” then-President Barack Obama told Michael Lewis in 2012. “I’m trying to pare down decisions. I don’t want to make decisions about what I’m eating or wearing, because I have too many other decisions to make.”
You get the idea.
Another good approach is to build more habits and make them good ones.
Left alone, our brains will try to make almost any repeated behavior into a habit, because habits allow us to act consistently and our minds to conserve effort. When we first learned to drive, it required intense concentration involving observing, estimating, steering, turning, adjusting, shifting, accelerating, decelerating, and braking. We were overwhelmed with the decisions we were forced to make in rapid succession, or even simultaneously. It seemed almost impossibly difficult and we weren’t very good at it.
Practice may not have made perfect, but it made us a lot better.
Thus, experienced drivers perform those actions routinely, without thinking very much. Our brains have “chunked” large parts of it. It doesn’t feel like we’re making decisions at all. And we’re much better drivers.
The more we can do that generally, the better off we’ll be. One study from Duke University estimated that habits, rather than conscious decision-making, shape 45 percent of the choices we make every day. If we can up that number some, we’ll improve our decision-making a lot.
Well-developed habits can apply and help in areas most of us would never expect.
Like jazz.
“Taking a solo is like an electric shock,” the jazz trumpeter Doc Cheatham told Whitney Balliett.
“First, I have no idea what I will play, but then something in my brain leads me to build very rapidly, and I start thinking real fast from note to note. I don’t worry about chords, because I can hear the harmonic structure in the back of my mind. I have been through all that so many years it is second nature to me. I also have what I think of as a photograph of the melody in my head. I realize quickly that there is no one way to go in a solo. It’s like traveling from here to the Bronx — there are several ways and you must choose the right way immediately. So I do, and at the same time I never forget to tell a story in my solo. I have always listened for that in other horn players, and it’s the only way I know how to play. I’m not a high note player generally, but sometimes the things I’m playing run me up there, and it frightens me a little. But I get down all right…. When I’m gone, it’ll be just about over, my kind of playing. It will be as if it hadn’t existed at all, as if all of us hadn’t worked so long and hard.”
There are other ways of reducing the number of decisions we make.
Daniel Kahneman, the world’s leading authority on human error, made this helpful suggestion.
“Algorithms beat individuals about half the time. And they match individuals about half [the] time. There are very few examples of people outperforming algorithms in making predictive judgments. So when there’s the possibility of using an algorithm, people should use it. We have the idea that it is very complicated to design an algorithm. An algorithm is a rule. You can just construct rules.”
We should create automated decision engines and implement them whenever and wherever possible. And if we cannot create an automated, algorithmic response, we should try to simulate one.
“Train people in a way of thinking and in a way of approaching problems that will impose uniformity,” Kahneman said. Checklists are a great example of this approach. So are building consistent rules, protocols, and guidelines.
For example, Kahneman, with colleagues Oliver Sibony and Cass Sunstein, wrote about a large insurance carrier that asked its underwriters to calculate estimates for a group of sample cases. The suggested premiums varied by an almost unbelievable median of 55 percent. Such inconsistencies are all about noise, which they define as “unwanted variability in judgments.”
Noise is obviously unfair and undermines the credibility of those victimized by it. It is also expensive. An insurance company executive estimated the annual cost of noise in underwriting in the hundreds of millions of dollars. Moreover, it’s easier for us to try to deal with bias than noise because it’s easy to create a narrative around bias. We humans are much better at thinking causally than statistically.
As Kahneman and his co-authors show, even when decisions and judgments are required, “guidelines succeed in reducing noise because they decompose a complex decision into a number of easier subjudgments on predefined dimensions.”
One caveat is in order, however. A system entirely devoid of human judgment and accountability – like 18th Century rationalists with a self-executing body of law and no human involvement – risks amplifying bias and noise. Exhibit A: Bureaucracy. It took more than four decades to remove a single insane EPA classification of milk as an “oil,” which required every dairy to spend thousands of dollars in anti-milk-spilling prevention devices, costing consumers billions of dollars over that time (only about 180,000 pages of federal regulation to go).
In related news, it takes good judgment to build the right habits, to create the right algorithms, and to use the right guidelines. Our tendency is to enforce compliance with “the list” rather than solve problems. As Aristotle explained, “it is impossible that all things should be precisely set down in writing; for enactments must be universal, but actions are concerned with particulars.”
It is well-established that humans are highly loss averse. Accordingly, modern society is organized more around the fear of bad choices than fostering good ones. While that isn’t altogether wrong, we should focus more on holding people accountable when something goes wrong and less on trying – with classic recency bias– to guarantee something like that can never happen again.
If you want to be a better decision-maker, start by finding ways to make fewer decisions.
Totally Worth It
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An auditioning call for new cast members at theme park results in a room filled with 25 people, each of them costumed as a knight, a serf, or a damsel. It is agreed that each knight will always tell the truth, each serf will always tell lies, and each damsel will alternate between telling the truth and lying. When each of them is asked in turn, “Are you a knight?,” 17 say “Yes.” When each of them is asked in turn, “Are you a damsel?,” 12 say “Yes.” When each of them is asked in turn, “Are you a serf?,” eight say “Yes.”
How many knights are in the room? Solution below.
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Puzzle Solution: Five. Suppose there are k knights and s serfs altogether and suppose there are d damsels who lied to the first question. In answer to the first question, the people who answered “Yes” were the knights (truthfully), the serfs (untruthfully) and the damsels who lied to the first question they were asked. This gives the equation k + s + d = 17. In answer to the second question, the people who answered “Yes” were the serfs (untruthfully) and the damsels who lied to the first question they were asked but who then answered truthfully. This gives the equation s + d = 12. Subtract the second equation from the second to give k = 5. Hence the number of knights in the group is five.
From The Ultimate Mathematical Challenge, by The UK Mathematics Trust.
Benediction
Wendell Berry: The Peace of Wild Things
When despair for the world grows in me
and I wake in the night at the least sound
in fear of what my life and my children’s lives may be,
I go and lie down where the wood drake
rests in his beauty on the water, and the great heron feeds.
I come into the peace of wild things
who do not tax their lives with forethought
of grief. I come into the presence of still water.
And I feel above me the day-blind stars
waiting with their light. For a time
I rest in the grace of the world, and am free.
This week’s benediction is a terrific Stevie Wonder tune: “Higher Ground.”
“I lived a whole world of sin | I’m so glad that I know more than I knew then | Gonna keep on tryin’ | ‘Til I reach my highest ground.”
To those of us prone to wander, to those who are broken, to those who flee and fight in fear – which is every last lost one of us – there is a faith that offers grace and hope. And may love have the last word. Now and forever. Amen.
Thanks for reading.
Issue 119 (June 24, 2022)
The distinction is perhaps best explained by a shooting-range metaphor. If all the shots land systematically off-target in the same way, that’s bias; if the shots are all over the place, it’s noise.