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Financial Freedom Is Merely Organized Common Sense
Making Better Decisions
Bayesian Probability
Good decisions drive good planning and lead to good outcomes. we should pay more attention to the skill.
Physician and author, Sid Mukherjee claims Bayesian logic is greatly neglected idea. The essence of Bayesian logic is that everything has priors. Things that have happened already. What will happen next, posterior probability depends on those priors and most of us do not pay careful attention to them.
- Every time we observe an outcome, we should be assessing the revised probability of something in particular happening. Most of us don’t do that. We carry on with old beliefs that often contradict the observation. Confirmation bias is the finding of things we think are right and ignoring the others. We think contradictory evidence is not real. We can go far astray with that approach.
- Sometimes we use “motivated reasoning.” Everything we see supports our pre-existing belief. Conspiracy theories rely on this sort of thinking.
- The idea of certainty is an illusion we all share to some extent. Bayesian logic builds on observations to create a changing probability for a particular event. We can never be sure, because no matter how carefully we assess the priors, they do not contain all possible information.
Decision making should be humble
People who use Bayesian logic, intuitively, or with intent, soon recognize that surprising things can happen in a stochastic world. These folks have two obvious characteristics.
- They will quit when things work against them. Perhaps a Plan “B” instead. In any case, they don’t try to make things work out to their satisfaction. They begin with the idea they will sometimes be wrong and adjust their vision as life unfolds.
- They are patient and persistent. They start another plan immediately following a loss and use the information they found in losing to their future advantage.
It is easy to see professional poker players using the technique.
Beware of Intuition.
Daniel Kahneman claims intuition does not work unless three conditions are met.
- There has to be some regularity in the world that someone can pick up and learn. Not many things in life are that regular.
- The second condition for accurate intuition is “a lot of practice.” Inexperience adds little value.
- The third condition is immediate feedback. You must know how to find the outcomes of your decision, objectively assess them, and know what they mean.
People often make decisions using their intuition, instinct, or experience. Sometimes none of the three conditions are present or fully developed. Making intuitive decisions for most of us is just guessing. Naming it as experience or intuition is not especially helpful
Results are the end of a chain.
One and done is uncommon
There is no such thing as a one decision stock. No business plan is beyond revision. No family life plan is immutable. Every plan must admit the possibility of change given observations not in keeping with the original plan. Good outcomes come at the end of many adequate or better decisions.
Thus the 3Rs of plan maintenance
- Record – Notice what happens. Do not bend reality to suit your plan.
- Review – Understand what happened and why it was different from expectation. Ignore the things that turned out as expected. Time saving value. We only learn from variations.
- Revise. – Take the new information and amend the expectation for the future. Be aware of secondary effects. Some of these arise from the context within which the event has happened.
No plan is ever complete.
Ones enshrined on good paper with colour pie charts are very official looking and because they seem complicated and arcane, we tend to think we are missing something if we don’t understand them. If you can’t understand the plan, you have no hope of making it work. Look for planners who make things simpler and more clear.
Recall how the early settlers of the west got to be there. Each morning they put the sun behind them and drive forward until it set in front of them. Thousands did that without the benefit of GPS. Most found the help of guide to be in their favour.
Your life will unfold in surprising ways. Have a few simple rules to govern it and seek the help of guide when the situation becomes difficult.
Good advisors are good guides.
They help you make decisions in times of uncertainty or chaos.
Reserve the right to make the decision. No advisor should do that for you. They don’t know enough about your particular priors.
I help business owners, professionals, and others understand and manage risk and other financial issues. To help them achieve their goals, I use tax efficiencies and design advantages to acquire more efficient income and larger, more liquid estates.
In previous careers, I have been a partner in a large, international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. don@moneyfyi.com 705-927-4770
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