How to systematically make better decisions

Our brains are wired to make quick decisions: get food, escape the predators and pass our genes. Stopping to make deliberate decisions sounds like a very bad idea and not worth the effort. However if we mainly rely on cavemen Joe and Jane’s gut in today’s world we are going to make decisions that we will regret later like not saving enough money to become financially independent, staying in the wrong job or wasting time in useless mind-numbing activities. A good decision making system will not guarantee ideal outcomes for every decision we but it will significantly increase the number of favorable long term outcomes and our happiness.

This post describes a systematic way of making decisions taken from the book Smart Choices which I encourage you to read. I have been using this method for a few months now and it has served me well. It consists of a total of 9 steps and it’s easy to remember through its acronym, PrOACT URL, which stands for:

Problem

What is precisely the problem that you are trying to solve? You should clearly define your decision problem and you should make sure it’s a root cause and not a symptom. Don’t try to decide on the problem “How to spend less money on my dishwasher maintenance that frequently breaks” when the real problem is that you bought a cheap and low quality dishwasher that requires significant maintenance. If you have an ill-defined problem you can spend a lifetime trying to solve it without getting anywhere. Techniques that work well for getting clarity on problems are rephrasing them and making them more specific or more general.

Objectives

What are your values? What things are you trying to improve? You can think of objectives as your ends, as the ultimate answers to “why” you want to do something. For example, if your decision problem is whether you want to buy a car or not when you ask yourself “Why do I want a car?” you may hear yourself saying: for convenience, to save money, to have more freedom and to save time. If you get a car you expect to get more of those things. By clearly stating your values you give your mind more material to come up with good alternatives that you may not consider if you don’t ask yourself “Why?”.

Alternatives

What alternatives do you have? Alternatives are the various solutions to your decision problem. You should try to come up with as many and as varied alternatives as possible. This is the best place to use your lateral thinking skills and creativity. Don’t limit yourself to the default, safest, most popular or to the first idea that comes to your mind. If you have decided that your decision problem is whether to get a car or not your alternatives could be “buying a new car”, “buying a used car”, “renting a car for the weekends and commute by bike to work”, “using a friend’s car”, “buying a motorbike” or “monitor used car deals websites periodically and buy a car once I find an offer that meets my criteria”. I find it useful to set a minimum alternatives quota and force myself to come up with at least X alternatives depending on the decision.

Consequences

What are the consequences of each of your alternatives? A good exercise is to imagine yourself in the future of each of your alternatives and take a honest look at the consequences of your actions. In the car example you may imagine yourself with a big great car driving to many places and enjoying it. But you should also imagine yourself paying car insurance, having the ocasional (lethal or non-lethal) accident, having to look for and pay for a parking spot, bringing the car to maintenance the morning you had a meeting at 9, getting stuck in traffic, etc. The goal of this step is to give you a complete view of what each alternative entails and resist the urge to focus only on the benefits.

Tradeoffs

Alternatives differ from each other in the specific tradeoffs that they make between the objectives involved. You can think of each alternative as a mix of your objectives with different proportions. A powerful technique to analyze tradeoffs is to translate how much you get of each objetive into a common unit like money. For example, if you have two alternatives with varying proportions of “time saved” and “money saved” you could translate time to money by determining how much money you would pay for a given amount of time and then apply the resulting conversion rate to eliminate the “time” objective and, as a consequence, be able to rank the alternatives by a single unit.

Uncertainty

Each alternative has some uncertainty associated with it because we can’t predict the future and we can’t measure with perfect precision every factor involved. However we can quantify uncertainty, that is how likely various events are, and use that information to help us decide. For example: if your decision problem is how to get from A to B, your two alternatives are to do so by plane or by car and the only thing you care about is risk of death then you could check what’s the likelihood of a car accident and a plane accident and decide that a plane is the best choice for you.

Risks

What risks are associated with each of your alternatives? As we just saw each alternative has varying amounts of uncertainty associated with them and each alternative has a different amount of utility or happiness that it will bring you spread over different values. You can calculate risk by taking each alternative’s total utility to you, after converting all the values of a single alternative to a single unit, and multiply that utility by the probability of the alternative’s positive consequences. Then you will be able to decide between alternative A with probability 5% of giving you $100,000 of utility and with probability 95% giving you $1,000 of utility is more or less preferable than alternative B which with 50% probability will give you $50,000 and with 50% probability will give you $500. There is no right or wrong risk threshold. The only wrong thing you can do is ignore your risk tolerance, go for alternative A and later realize that with those odds you shouldn’t really have made the decision. Every person is comfortable with a different level of risk and even the same person will have a different risk tolerance depending on the circumstances. When we are young we are more risk-seeking, useful for hunting and mating, than when we are 80 years old and when we are hungry we are far more risk-seeking than when we have just finished meditating for similar reasons. Determining what level of risk is right for you will help you choose the alternative with the right level of risk for you.

Linked decisions

For each of your current alternatives what decisions will you face in the future? Alternative A to your current decision problem, eg: buy that expensive house you like so much, may sound very appealing today but it will severely limit your options in 20 years when you want to send your kids to university and you are still paying debt.

You should go through this list in the order presented and, as soon as you have a clear winner you don’t need to continue with the remaining steps. I personally found it very useful at the beginning to go through all the steps anyways to get comfortable with them and to make sure I had the right calibration for when to stop. Nowadays I only reach the end of the list for really important or difficult decisions.

We cannot possibly apply this process to every one of the hundreds of decisions we make every day because it would take too much mental energy and time but not all of the decisions we face are equally important. What you want to do is strike a balance: identify the decisions whose consequences will affect you more, apply this method on them and then let cavemen Joe and Jane’s gut handle the rest. With practice this process will become second nature and you will be able to be systematic with a wider range of decisions.

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