Two advice on how to avoid bad financial decisions

Do you also have bad financial decisions, like most people? You can be really good at mathematics, but this is not related to it at all. There is something subjective to look for bad decisions.

Financial decisions include a number of variables – your future income, interest rates, housing price developments, tax rates, and more. We can make reasonable predictions, but ultimately these decisions require us to make judgments without complete information. In her book last year, Annie Duke offers two strategies that help make better decisions. Duke used her expertise in intelligent decision making. In “Thinking in Strikes: Making Smarter Decisions When You Don’t Have All the Facts” reveals to readers how to use elements of cognitive psychology in real life decisions. It offers two strategies.

Never be absolutely sure
As a former poker player, Duke knows how important the smallest stimuli are. For this reason, it offers a number of recommendations on how to communicate better. For example, whenever you discuss a financial question, with a spouse, business partner, lawyer, or financial advisor, try to avoid the question: “Are you sure? Instead, try the alternative: “How confident are you?” A simple change but essential. First, you recognize the fact that there are very few absolute truths in terms of financial decisions. Secondly, it allows for a healthier exchange of ideas. The question “Are you sure?” He puts the other person on the defensive. It is a yes or no question and does not allow anyone to express less than a certain level of confidence without feeling defeated. But the alternative wording ‘how sure are you?’ Allows for a more open discussion and this may lead to a more thorough decision.

If you have doubts: Two tips on how to avoid bad financial decisions

How do you apply this principle to your finances?
When you make financial decisions, be aware that you cannot be 100% sure of how something will develop. Instead, think about the range of possible outcomes. Ask yourself, “what could go wrong?” Try to figure out what that means to you. For example, if you expect an investment of around 10% return, ask yourself, “What would happen if I lost 10% instead, and maybe more?” Would that change your decision? Or can you take further steps to protect yourself from this outcome?

You can be sure of one. That you can’t protect yourself from every extreme scenario. For example, there will be a 90% fall in the Great Depression market. However, this would be a repetition of relatively recent events. We have seen a 50% decline in the market in the last 20 years.

Avoid result-based evaluation
When a player continues to win, he must separate the luck from the process. If they can, they can improve future results and understand what can be attributed to skill and what can be attributed to randomness. Similarly, when a player loses, understanding what would be best compared to probability is equally important. The other is when the players mistakenly evaluate their strategy in the game. For example, if a player wins, he could conclude that he was playing well. Although it seems logical, it is a mistake because it overlooks the potential role of happiness. It also overlooks the fact that other players could play badly. It is a view of one result as opposed to a wider range of probabilities. In other words, just because something goes well does not necessarily mean that you have followed a good strategy. And just because something is wrong, it does not mean that you have followed the wrong strategy.

If you have doubts: Two tips on how to avoid bad financial decisions

How should you apply this principle to your finances?
To avoid the consequences of evaluating past decisions, keep notes to document all your major financial decisions. All you have to do is write down the basic facts, along with a justification to make them understandable for future use. This allows you to reassess the results of your decisions without overwriting the facts in your mind to match the outcome. You should be careful when assessing others’ decisions. If the investment manager delivers great results, do not attribute this success solely to his skills. Instead, it is better to evaluate his strategy and ask, “how much of it was a matter of happiness and how much skill?”

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