The problem of decision choice – Investors don’t look at enough alternatives

| | Decision-Making

Paul Nutt, a leading decision-making researcher – Only 15% of the case studies saw decision-makers actively try and seek-out new options than what were available at the outset. Only 29% of organizational decisions contemplated more than one alternative. (From Farsighted by Steve Johnson)

 

There is more to decision-making than “whether or not”.


Too often decision-making is bereft of choices. Everything is condensed into a “go or no go” decision, or just an act of rejecting the choice that is placed on the table. This is just a choice between one change and maintaining the status quo. Think how limiting decision-making is under this simple environment. Yes, limiting choices simplifies problem-solving but it also limits opportunities.

 

It is not easy to develop alternative choices. We naturally like to limit our choices because our ability to process multiple pieces of information is limited. We also have a problem with processing alternative models that may be in conflict. Alternative models require acceptance of disorder when we prefer an ordered world that follows a few simple rules. So what should an investment manager do?

 

When presented with a single choice, ask for more. What are we forgetting? Ask for the choices that were eliminated from consideration. However, the most important requirement is not the choice of action but expanding the forecast choices. Investment choices are limited because the environmental choices are limited. Ask for alternative realities. For example, if we believe that the Fed will not raise rates in 2019, there is a limited set of choices for action. If you accept that there can be alternative realities where the Fed may act to raise rates, albeit unlikely, the investment choices are greater and more complex. The set of choices is a function of the set of assumptions used. Change assumptions and choices change. Ask for different assumptions and see if choices change. Along with increasing the choices is a requirement to handicap their likelihood. More alternatives are good, but the likelihoods of alternatives are not the same. 

 

Increasing choices goes back to basics – look for alternatives and weight them by their probability of success. Increase choices of forecasts and increase choices of action. Map a set of forecasts into a set of actions.