Let me tell two stories: one about surfers and one about stockbrokers.
A surfer friend was telling me about what it is like to figure out where to surf on a beach. You pile into a truck with your friends and your surfboards and head out to the beach. Once you get there, you and your friends get out and have a look at the waves. They look good, but the general consensus is that the conditions might be more promising a few miles down the beach. This process repeats itself and a few hours pass. The wind dies down. You go out and hit the waves a bit, but there is the unspoken sentiment that the group would have been better off jumping into the water at one of the first places.
A friend who trades stocks recently lost several thousand dollars on the stock market. He assumed in hindsight that his decision-making had been bad and thus felt dejected that he had not made better decisions. He decided to take the day off and not spend time with his friends. The uptake of our discussion was that the proper format of behavior is to be emotionally divorced from the behavior of your stocks. The market goes up and down, but there is no reason to allow this to impact your self-perception of your decision-making.
The lesson of these two stories is this: decision-making is not a science. Behavioral economists understand humans as being very flawed in their decision making.
Dan Ariely placed six-packs of soda in certain communal fridges on college campuses and placed plates of six one dollar bills in others. The sodas vanished, but the cash did not.
The human mind is not built for the economic decision or the opportunity-cost judgment. So, how should we make decisions?
Quite simply, go with hunches and roll with punches.
To make a sub-optimal decision quickly is often more useful than to make an optimal decision slowly. To be understood as legitimate in the world of business, you must be able to act quickly and effectively. A faster actor can out-run a slower mover: this is the advantage of a small business over a larger one. Slow action is the smoke screen of bureaucracy and the old-fashioned scientific process of making decisions, which has been shown to result in failure countless times.
If you bet on a coin flip with even odds, you have made a zero-sum economic decision. To laud yourself as a saint if the flip is heads or to bash yourself as a dunce if it is tails are irrational reactions. Buying a lottery ticket is a bad decision; putting down a big bet on a straight flush is a good decision. If you win the lottery, you still made a bad decision in buying the ticket (unless you were cheating!) and if you lose to a royal flush, you still made a good decision. Decisions are best analyzed in hindsight based on probability, not on results. This is to say, don’t kick yourself if a good (well-construed) decision goes south. It is completely reasonable to cut your losses if something looks bad, and it is neither reasonable to ride your yacht down a whirlpool nor to jump out of your airplane when turbulence hits.
Each decision is good or bad based on how swiftly and definitely it is made and how good or bad it looks at the time you are making it.
There are some games that are difficult to win, but what matters in the end is how well you play.
