Improve The Way You Make Decisions
Make Better Money Decisions
My uncle was in the military when I was growing up. He and his family obviously traveled a lot, and my grandma didn’t get to see them much. None of us did. They were always so far away.
At one point -- I was in high school at the time -- he was stationed in Texas. My granddad had recently passed away, so my grandma decided to pack up from Alabama and visit him.
She had a grand time, seeing the sights and hanging out with her youngest son. She even visited the Alamo and picked up a souvenir for me.
It was a small polished rock with a Davy Crockett quote printed on it:
“Make sure you are right, then go ahead”
So Are You Right?
I’m sure at this point you’re thinking the same thing I am. “How is he going to dig himself out of this weird hole and make this about personal finance?”
See, I know that souvenir was trivial. An insignificant thing probably bought as an afterthought. I mean, who would think otherwise? It’s a rock.
But that rock, or more specifically the quote on it, holds a much deeper insight into our psychology and our choices. How do we respond when we’re wrong, and how can we make sure we’re right?
How It Feels To Be Wrong
We all make major mistakes in life. That’s not the (main) problem.
The problem is how it feels when we’re wrong: exactly the same as when we’re right. The feelings that we associate with being wrong -- shame, guilt, embarrassment -- actually only develop when we realize we’re wrong.
Sure, those feelings suck, but the earlier you realize you’re wrong, the earlier you can minimize any potential fallout. Decisions tend to become more important the more time passes.
If you want a better life, it will help to get good at decision-making.
What It Costs To Be Wrong
Everything. Bad decision-making will lead to failure.
If you don’t take a step back before making major decisions to make sure you’re right, there’s a high probability you’ll screw up.
The wrong house, the wrong job, the wrong marriage. These mistakes can cost you millions of dollars throughout your life. Isn’t it worth taking the time to make sure you’re making a good decision?
What If You’re Wrong?
Here’s an easy test to evaluate the gravity of any decision. When you’ve made up your mind but not yet acted, take the time to ask yourself “what if I’m wrong?”
Spend a few minutes and write down the worst-case scenario. Imagine your life after you've made this choice and it's blown up in your face.
The bigger the catastrophe, the more important it is to check your cognitive biases and make sure you’re making a good decision.
Spending Money Because Of Emotions
We are all emotional creatures. They influence every decision we make. In fact, the less emotional someone claims to be, the more emotional they probably are.
If you aren’t in tune with your emotions, you won’t notice when they’re leading you down the wrong path in life. You’ll spend more money than you wanted on things you didn’t value.
Worse, you’ll make up some reason for why it’s actually what you wanted. And you’ll be wrong.
Make better money decisions by paying attention to your emotions.
Finding Your Cognitive Blind Spots
We all have blind spots when it comes to our choices. Our brains take constant shortcuts, called heuristics. These can lead to what is known as cognitive bias.
And cognitive biases are a big problem when it comes to making better decisions. Your brain makes a decision exactly wrong and convinces itself it’s 100% right.
Figure out in what situations you’re likely to fall victim to these biases, and work to overcome them. You'll never be perfect, but you can certainly get better.
How Do You Make Sure You’re Right?
You’re ready to buy a house, but not sure which choice to make.
You’re looking to settle down, but need to make sure you’re making the right decision in a spouse.
You need to pay off your debt, but don’t even know where to begin.
We make a lot of tough decisions. How do we make better money decisions?
Turn To The Numbers
Okay, so you shouldn’t use hard numbers to find your spouse. While it’s certainly a big financial decision, there are many more important things at play in that choice.
For all your other financial decisions, you should turn to the numbers to confirm your decision. Decided to pay off a particular credit card first? Look at the APR for your card of choice and calculate your interest payments.
Financial decisions can generally be quantified. Make sure the numbers agree with your decision-making.
Admit When You’re Wrong
Your brain is a pattern recognizing machine. The easiest way to tell when you’re wrong, is to admit it.
As your brain builds up a history of you admitting to yourself that you’re wrong, it will start to build that into your decision-making framework.
Then, next time you head to Vegas and start to bet $10,000 on black, your brain will flag it. “Hey buddy, remember how we’ve been wrong most other times we’ve gambled? Maybe we’re wrong here.”
And because you’ve established a pattern of admitting when you’re wrong, you’re more likely to listen to that voice and keep your wallet in your pocket.
Conclusion
It can be tough to know when you’re wrong, but it’s important to take the time to find out.
We all think we’re intuitively good at making decisions, but it just isn’t true.
By slowing yourself down and evaluating your decision, you can save yourself the embarrassment of finding out you were wrong after it’s too late.
Crunch the numbers and be willing to admit when you’re wrong. We all make bad decisions.
Then go ahead.