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The secret to making good decisions

General

07/04/2015

Whether in our relationships, careers or investments, knowing how to make good decisions is a skill that can be learned – if we choose to recognise both our emotional and rational minds.

Kenny Rogers, Psychologist at large

Iconic country music performer Kenny Rogers said it all in The Gambler when he drawled “you’ve got to know when to hold ’em, know when to fold ’em, know when to walk away and know when to run”. Although Rogers didn’t know it, he was singing about the role of the brain’s dopamine and opioid systems in determining short- and long-term gratification.

Behavioural psychologist Dr Susan Weinschenk says that, while the ‘wanting’ (dopamine) and the ‘liking’ (opioid) systems complement each other, dopamine is stronger and can trap us into a loop of short-term gratification. People tend to make choices based on immediate good feelings, even if they’re making a poor decision – long-term gratification just doesn’t give the same instant hit.

This loop can drive poor choices such as sinking more time, money or effort into a bad relationship, career or investment. This behaviour is often called ‘sunk’ or ‘unrecoverable cost’, and it’s a good example of what’s called a ‘cognitive bias‘ – which is a tendency to think in a certain way.

So, how can you tame your brain’s natural inclinations – your cognitive biases – and make better decisions? We’ve compiled some of the top suggestions from psychologists for how to overcome the roadblocks to making good decisions.

The three deadly sins of investing

The main three emotions that drive potentially poor investment decisions are fear, greed and indifference.

Emotion Problem Solution

1. Fear

Selling low can lock in losses and cause missed opportunities.

Don’t panic – focus on long-term goals.

2. Greed

Chasing past performance can lead to buying high.

Stay diversified. Spread investments across various asset classes.

3. Indifference

Doing nothing – setting and forgetting can cause your investment to stagnate.

Be diligent and adaptive.

Be what you want to be

Be aware – awareness of how the brain works and your cognitive biases are the first steps to reducing the impact of those biases.

Be collaborative – ask someone else to help you make the choice. This may be the best tool for making good decisions because they’ll see your biases more clearly than you do.

Be disciplined – devise a consistent framework for making decisions, and then stick to it.

Be inquiring – keep asking questions about your biases and those of your collaborators.

Be flexible – good decision makers go with the flow. If you’re familiar with the area, then go with your intuition. If it’s new territory, go for the facts.

Be honest – remember your reasons for choosing previous courses of action and be truthful about the results. In other words, learn from your mistakes.

Be nimble – be prepared to cut your losses. Don’t throw good money, time or emotions after bad.

Be objective – place yourself outside the situation. What’s the worst that can happen? The best? List the pros and cons.

Be optimistic – it’s okay to feel good about your choices.

Kenny Rogers was right – you can push back from the table and look at your choices in many situations. It is possible to change from a bad relationship, career or investment into one that will deliver much better returns.

So, the challenge is to decide to do it today – and where better to start than by looking at your superannuation choices to see if they’re still aligned with your life. A simple place to start may be to check your contact details, search for lost super or make an investment choice.


All information contained in this article is sourced from Russell Investment Management Limited (ABN 068 338 974).and is considered to be reliable however is not guaranteed. This article is issued by the Trustee of The Victorian Independent Schools Superannuation Fund (ABN 37 024 873 660, RSE Registration number R1000436, MySuper Authorisation 37024873660599) VIS Nominees Pty Ltd (ABN 11 006 586 367 AFS Licence number 235097, RSE Licence number L0000321). The information provided in this article is general information only and does not take into account your personal financial situation or needs. You should consider obtaining advice that is tailored to suit your personal circumstances.

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