Last Updated on May 1, 2022 by Chin Yi Xuan
It’s crazy how all of us have been a better decision-maker in just about anything other than money-related scenarios in life:
-
Science experiment at High School (assuming you listened in class):
Experiment: Does salt make water boil faster?
Hypothesis 0 (H0): Salt makes water boil faster.
Hypothesis 1 (H1): Salt has no effect in making the water boil faster.
Fixed Variable: Size of the boiling tube, Amount of water in each trial, Temperature of the room.
Independent Variable: The amount of salt added to the water (g)
Dependent Variable: The time taken to boil the water to 100°C
Outcome: Salt has a negligible impact on getting water boiled faster. (Okay… I googled it)
Decision: Stop adding salt just to boil the water in the future.
-
Trying to see if our crush has the same feeling towards ourselves:
Experiment: Does Annie has the same feeling towards me as I have towards her?
Hypothesis 0 (H0): Yes, she has.
Hypothesis 1 (H1): Friendzoned.
Fixed Variable: My looks.
Independent Variable: Time and effort taken in this pursuit.
Dependent Variable: Whether she has a crush on me.
Action: Confess.
Outcome: She said I am just a good friend.
Decision: Stay single until I meet the next girl that’ll make my heart pikpok pikpok.
However, this is what goes through the mind of most people when ‘investing’ in a company in the stock market:
Action: Investing in a company in the stock market.
Subconscious Mindset: “The ONLY outcome from this investment is that it will make me a lot of money.”
—
Here’s my point:
From high-school science experiments to even the lamest part of our relationship life, we have a set of rather similar decision-making processes (sometimes made subconsciously).
This includes setting up hypotheses: IF X happens THEN I’ll do Y. IF A happens THEN I’ll do B.
This includes having a set of variables (Fixed, Independent, Dependent) in place while making our decisions.
Simply put, we come to a decision with the understanding (or acceptance) that there are uncertainties in the outcome of our decisions, AND there are things beyond our control or knowledge in every decision that we make.
In these decisions, we embrace uncertainties and a lack of complete information and control in our execution.
But not so much when it comes to investing.
When it comes to investing, most people yearn for absolute certainty (eg. “how many percent of return can you guarantee for my investment?”). The fact that the market and business are even more dynamic and uncertain makes seeking absolute certainty a suicidal act for investors.
—
So this leaves us with 4 takeaways from this week’s newsletter:
- Have a proper process in place for your decision-making when it comes to any financial and investing decisions. (I share about them in great depth in my REIT investing sharing session)
- Focus on the process, not the outcome. In a small sample size of one or two decisions, the quality of your decisions should not be measured by the quality of the outcome – luck could play an unexpected role in a small sample size of decisions (ie. You could get lucky with bad decisions, or pure unlucky with good decisions).
- Treat every decision as a hypothesis. This leaves you the capacity to be proved wrong (or right) and still be able to recover (fast) and learn from your mistakes.
- Trying to look for absolute certainties in a market full of human emotions and uncertainties is a bad, bad idea.
Hope this week’s newsletter is thought-provoking!
Till next week 🙂
p.s. Do you like Part 1 of this decision-making newsletter? Let me know by leaving a comment in the comment section below, and if the responses are good, I’ll come out with Part 2: Luck in decision-making!
Related Posts
November 1, 2019
If/Then Mindset: How this Hugely Overlooked Mental Skill will Transform Your Investing Performance
Have you ever been in a situation,…
Subscribe to No Money Lah's Newsletter!
Get FREE updates to tips & ideas to live a better and more fulfilling financial life :)
Thank you!
You have successfully joined our subscriber list.
Chin Yi Xuan
Hi there! I am Yi Xuan. I am a writer, personal finance & REIT enthusiast, and a developing trader with the goal to become a full-time funded trader. Every week, I write about my personal learnings & discovery about life, money, and the market.
Like what you mentioned in the second example 😀 really cool haha; on another note yes emotions need to be set aside in order to be level headed and make smart decisions when it comes to investments. Looking forward to Part 2!
Hey Daniel!
Thank you so much for your comment and glad you like this article! Emotions are indeed something we have to be mindful of in our investing journey haha!
p.s. looking forward to read your blog too when it is up and ready!
Yi Xuan