How to decide

Joash Xu
·Nov 30, 2020·

7 min read

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Book Information

Book Cover

Author: Annie Duke

Title: How to Decide

Published: 2020

Notes

How to make a decision

  1. The 3P: Preference, payoffs, and probabilities

    • Preferences depend on your goals and values and is individual to you.
    • Payoffs is how an outcome affects your progress toward or away from a goal. Payoffs can be measured in anything you value (money, time, happiness, health, etc.).
      • Some possibilities will have payoffs where you gain something you value. These comprise the upside potential of a decision.
      • Some possibilities will have payoffs where you lose something you value. These comprise the downside potential of a decision.
      • Risk is your exposure to the downside.
    • Probabilities express how likely something is to occur.
    • Incorporating preferences, payoffs, and probabilities into a decision tree is an integral part of a good decision process.
    • When you are figuring out whether a decision is good or bad, you are comparing the upside to the downside. Does the upside potential compensate for the risk of the downside potential?
    • Combining probabilities with preferences and payoffs helps you more clearly evaluate and compare options.
  2. Six steps to better decision making

    1. Identify the reasonable set of possible outcomes.
    2. Identify your preference using the payoff for each outcome--to what degree do you like or dislike each outcome, given your values?
    3. Estimate the likelihood of each outcome unfolding.
    4. Assess the relative likelihood of outcomes you like and dislike for the option under consideration.
    5. Repeat steps 1-4 for other options under consideration.
    6. Compare the options to one another.

Things to avoid when making a decision

  1. Outcome bias

    • Outcome bias is a mental shortcut in which we use the quality of an outcome to figure out the quality of a decision. It is when we figure out whether a decision was good or bad from the good or bad result.
    • The relationship between the decision process and the outcome is loose. They are correlated, but the relationship can take a long time to play out.
    • Luck can intervene between your decision and the actual outcome.
    • When you make a decision, you can rarely guarantee a good outcome (or a bad one).
    • The goal of good decision making is to choose the option that will lead to the most favorable range of outcomes.
  2. Hindsight bias

    • Hindsight bias is the tendency to believe that an outcome, after it occurs, was predictable or inevitable.
    • The learn from your choices and their outcomes, you need to be accurate about what you knew at the time of your decision.
    • This bias casts a shadow over your ability to accurately remember what you knew at the time of the decision.
    • You can identify this bias when you say things like "I should have known it.", "I told you so." or "I knew it all along."

Things to understand when making a decision

  1. Decision multiverse

    • When you make a decision, there are many possible futures. It is like look the branches of a tree, each branch representing some way things could unfold.
    • Viewing the outcome that occurred in the context of other potential outcomes at the time of the decision can help with decision making.
    • Creating a simplified version of a decision tree puts the actual outcome in its proper context
  2. A willingness to guess

    • Most people are reluctant to estimate the likelihood of something happening in the future.
    • Even though your information is usually imperfect, you know something about most things, enough to make and an educated guess.
    • The willingness to guess is essential to improve decisions. If you do not make yourself guess, you will be less likely to ask "What do I know?" and "What don't I know?"

Decision-making masterclasses

  1. The power of precision

    • Express probabilities as a percentage rather than using ambiguous terms like "likely", "probably", etc. Terms that express likelihoods mean very different things to different people.
    • It will help you uncover information that can correct inaccuracies in your beliefs and broaden your knowledge.
    • In addition to making precise (bull’s-eye) estimates, offer a range around that estimate to express your uncertainty. Do this by including a lower and upper bound that communicates the size of your target.
    • The size of the range signals what you know and what you do not know. The larger the range, the less information or the lower the quality of the information informing your estimate, and the more you need to learn.
  2. Inside view vs. outside view

    • The inside view is the view of the world through your perspective, your beliefs, and your experiences. Many common cognitive biases are, in part, the product of the inside view.
    • The outside view is how others would see your situation, or what is true of the world in general, independent of your perspective.
    • The outside view acts to discipline the biases and inaccuracies that live in the inside view, which is why you want to anchor first to the outside view.
    • Accuracy lives at the intersection between the inside view and the outside view.
    • A good way to get to the outside view is to look for any base rates that might apply to your situation. For instance, if you are thinking of starting a restaurant and estimating the probability of success at 90%, know that only 40% of new restaurants make it past the first year.
    • Another way to get the outside view is to seek out other people's perspective and feedback.
  3. Handling analysis paralysis

    • We spend an enormous amount of time on routine, inconsequential decisions. What to eat, which movie to watch, etc.
    • There is a time-accuracy trade-off: increasing accuracy costs time. Saving time costs accuracy.
    • The key to balancing the trade-off between time and accuracy is figuring out the penalty for not getting the decision exactly right.
    • If the penalty is small or nonexistent, you should decide faster.
    • To find out if a decision is of low impact, ask yourself if the outcome of your decision, good or bad, will likely have a significant effect on your happiness in a year. If the answer is no, you can speed up your decision making.
    • A freeroll is a situation in which there is limited downside. Save time deciding whether to seize a freeroll; take time in deciding how to execute it.
    • When you have multiple options that are close in potential payoffs, just pick one.
    • When a decision has a low cost to quit, you can go fast.
    • When you are facing a decision with a high or prohibitive cost of changing your mind, see if you can stack the decision. For instance, if you want to buy a house, maybe rent a place to see if you like living in that area.
  4. Utilising negative thinking

    • We are pretty good at setting positive goals. But fall flat at executing the things we need to do to achieve them.
    • The message of the power of positive thinking is that you will succeed if you imagine yourself succeeding.
    • However, positive visualization alone will not give you the best route to success.
    • Negative thinking helps you identify things that might get in you way so you can identify ways to reach your destination more efficiently
    • A premortem is when you place yourself in the future and imagine that you have failed to achieve your goal. You then consider the potential reasons things worked out poorly.
    • Backcasting, is where you work backward from a positive future to figure out why you succeeded.
    • Once you have established that you are sticking with your goal or decision, you can create precommitment contracts, which raise barriers to behavior that interfere with your success or lower barriers to encourage behavior that promotes your success.
    • Prepare for your reaction to setbacks along the way to your goal. People compound negative outcomes by making poor decisions after a bad result.
    • The Dr. Evil game helps identify and address additional ways your behavior in the future might undermine your success. In the game, you note how Dr. Evil would control your mind to make you fail through decisions that are justifiable as one-offs but unjustifiable over time.
      • The Dr. Evil game can encourage you to adopt a precommitment called a category decision, where you decide in advance what options you can and cannot choose when you face a decision that falls within that category.
    • You can also address potential bad luck by hedging, paying for something that mitigates the impact of a downside event occurring.
  5. Getting feedback

    • One of the best ways to improve the quality of your beliefs is to get other people's perspectives.
    • Beliefs are contagious. Informing somebody of your belief before they give their feedback significantly increases the likelihood that they will express the same belief back to you.
    • Exercise decision hygiene to stem the infection of beliefs.
    • Keep your opinions to yourself when you elicit feedback.
    • Build a checklist or relevant details for repeating decisions and make that checklist before you are in the midst of a decision. And be accountable to the checklist.
 
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