“Life is a sum of all your choices.” – Albert Camus, French philosopher 

One of the most controversial decisions in Super Bowl history occurred in the closing seconds of Super Bowl XLIX in 2015. With 26 seconds left and down four, the Seattle Seahawks had the ball on second down at the New England Patriots’ one-yard line. Most expected Seahawks coach Pete Carroll to call for a handoff to running back Marshawn Lynch, one of the best running backs in the NFL. 

But Carroll called for quarterback Russell Wilson to pass, and New England intercepted the ball, winning the Super Bowl. The Washington Post called the decision “the worst play-call in Super Bowl history” and a USA Today headline stated: “What on Earth Was Seattle Thinking With Worst Play Call In NFL History?”

Yet all the headlines and Monday Morning quarterbacks missed something hidden in plain sight: The decision to throw the ball was sound, if not brilliant. An interception was a doubtful outcome. Out of 62 passes attempted from an opponent’s one-yard line during the season, zero had been intercepted. In the previous 15 seasons, the interception rate in that situation? 2%. Many people blamed Carroll for the loss, but he made a sound decision based on the information available. He just got unlucky. 

Carroll was the victim of our tendency to equate a decision’s quality with its outcome, according to Annie Duke, a former professional poker player turned cognitive-behavioral decision science writer and educator. A good outcome might be the result of a bad decision, and a bad outcome can be the result of a good decision. Don’t confuse the outcome with the quality of the decision. That’s called “resulting.” Results overshadow the decision process, leading you to overlook important information. You can see how this could relate to investing, where you can make a sound decision and still lose money. Or, we can make a poor decision but generate the desired return due to the role of luck. 

Avoiding our tendency to analyze our own investment decisions solely based on outcomes, rather than the actual decision process, is critical to improving the quality of our decisions. Studying our choices can help us be better investors. 

Getting comfortable with uncertainty

Imagine your best investment decision in the past year or two, as well as your worst. 

Chances are, your best decision preceded a good result and your worst decision preceded a bad result. Many of us identify the best and worst results rather than the best and worst decisions. In life and investing, we can make good decisions that have bad outcomes. It happens all the time. Duke shows this idea through a diagram with four quadrants:

1. Good decision, good outcome
2. Good decision, bad outcome
3. Bad decision, good outcome
4. Bad decision, bad outcome

Writes Duke: “When you make a decision, it’s rarely guaranteed to get a desired outcome (even if that’s a good decision). Your goal then should be to choose the option that will lead to the most favorable ‘range of outcomes’.”

Hindsight bias is the tendency to believe that an outcome, after it occurs, was predictable or inevitable. Like resulting, hindsight bias is too focused on outcomes over the decision-making process. We say things such as, “Should have known,” or “I knew it all along.” Investors have looked back on 2022’s tough year for markets and said, “I should have known the Fed was going to hike rates and stocks would decline after three straight years of gains.” 

Instead, investors should try to be as accurate as possible about what they knew at the time of the decision, not what they learned afterward. Before making a decision, Duke suggests starting with a decision tree to document potential decisions, possible outcomes, and the likelihood the outcomes will occur. The latter is the most important and overlooked. It’s about probabilities:

Duke’s mental models for decision-making

1. Identify the reasonable set of possible outcomes. Create a decision tree. Examine a decision by asking yourself: What facts do I have? What do I know and what do I believe? What assumptions or biases might be hiding in those beliefs? What are my options? Duke writes: “Identifying the set of reasonable outcomes is a huge improvement over having particular outcomes distort your view (the actual outcome for past decisions, or prospective outcomes you especially desire or fear).”
   
   
2. Identify your preference for each outcome. List the potential outcomes on your decision tree in order of your most preferred to least preferred. For nearly every decision, there are outcomes we hope for and others we don’t. You need to think about whether a potential outcome is good or bad, but also how good or bad. You can express probabilities by using terms such as “rarely, unlikely, with low probability, possibly, likely, frequently, often,” etc. Writes Duke: “To figure out whether a decision is good or bad, you need to know not just the things that might reasonably happen and what could be gained or lost, but also the likelihood of each possibility unfolding. That means, to become a better decision-maker, you need to be willing to estimate those probabilities.” You might convert the decision tree likelihood into percentages:

3. Think outside of a particular decision. “The worst time to make a decision is when you’re facing one down. Build in guardrails now, so your future self is less tempted to take the easy way out,” Duke writes. This way, we can zoom out from the specific investment decision to think about the general decision space. You might say to yourself, “What are the kinds of factors that would help someone in my shoes come to a sound decision here?”
   
   
4. Bring others in and listen. But when asking others for feedback on a decision, don’t tell them what you think before you find out what they believe. You can ask everyone to email you directly instead of replying all when you want feedback. Many top investors have a network of other investors to help talk through decisions. 
   
   
5. Review the good with the bad. “Examining only one side of the equation not only causes you to miss out on half of your opportunities to learn, but it also encourages people to be too conservative in their projections,” Duke writes. When considering past investments, think about what you knew before you made them, what was revealed after the fact, and what you could have known beforehand. 

Writes Duke: “That’s part of why it’s so important to good decision-making to ask yourself about the possibilities, the payoffs, and the probabilities that the future will unfold in various ways. It forces you to assess what you know and seek out what you don’t.” 

Other tips from Duke:

• Trim the number of decisions you make to try to increase the quality of the decisions you do make. Some elite investors set a limit to the number of stocks they own or buy/sell in a given year to ensure they are making fewer but higher-quality decisions. 
• “Trust your gut” is standard advice, but Duke warns that the “gut” is where our biases live. It’s not necessarily your best decision-making tool, and it can be emotionally wired, a dangerous place to be in financial markets. 
• More people involved in a decision is helpful, assuming you leverage each person’s independent thinking rather than simply urge them to confirm your belief.
• “Negative thinking” is a way to try to foresee all ways an investment could go wrong. Mitigate issues before they occur. 
• Working backward from a result to figure out why it happened is ill-advised because we’re susceptible to various cognitive traps, such as cherry-picking data to confirm the narrative we prefer. 
• Break free from analysis paralysis. The average person spends about 250 hours per year deciding what to eat, watch on TV and wear. Thus, we need systems to organize and streamline small, routine decisions. 

Conclusion

To be a better thinker and investor, consider the role of resulting and hindsight bias. Consider starting an investing journal to jot down and internalize your decisions, then revisit past decisions to review your thinking and where you went right or wrong. Try utilizing a decision tree before your next investment. Duke recommends avoiding a pro/con list in decision-making, as it reinforces biases you already have. For further reading, you can purchase her books, How to Decide and Thinking In Bets. 

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