One Mental Trick for Investors to Make Better Decisions
One Mental Trick for Investors to Make Better Decisions
If you took out a second mortgage and depleted your savings to buy Bitcoin before the 2021 bull run, are you a genius or an idiot? Well if you sold a few months later, you’d probably say genius. But you are an idiot.
While the outcome of ‘betting the farm’ in that scenario was a positive, the decision was a poor one for an investor to make. Cryptocurrency assets are extremely volatile. Being over exposed to such a risky asset is a bad financial decision because you have such a high probability of going broke.
If you make bad decisions like this over a lifetime, the odds of a catastrophic negative outcome are likely.
Make the best decision possible with the information you have.
We only ever see the outcomes in the real world. Which makes it difficult to know if we made the right decision beforehand when the results are not in our favor. It can also lead to regret if we feel we missed the boat on something by not taking action.
Writing down your thinking before making a decision can help avoid hindsight bias. It can also force you to clarify your reasoning. But it’s hard because you’ll never for sure if your upfront logic was correct.
Celebrate good decisions, not good outcomes.
Life is a series of choices. You will make many. If you can improve the quality of your decisions, you will improve the quality of your outcomes and therefore improve the quality of your life over time.
Do not judge yourself on the result. Look at your decision making process.
What were your sources of information?
What was your reasoning?
How biased were you?
In hindsight, was there more or less information you needed?
Would you have made the same decision again knowing what you knew then? What about knowing what you know now?
Don’t get hung up on any single decision’s result, there are too many unknowns to know for sure what was the right choice.
Focus on analyzing and improving your decision making process. There will be many more decisions to make.