I’ve made mistakes. Picked the wrong option, turned down the wrong path, lost money in investments. You will, too. It is impossible to get everything right. The thing is – you don’t need to be perfect to make progress.
Chasing perfect decisions is a recipe for disappointment, wasted time, inaction. Instead, free yourself from the need to optimize and accept that sometimes your choice will be wrong. I’ve realized that even with my worst mistakes, I’ve come out okay because I made a solid decision going in.
Hey, if you’ve got everything lined up perfectly, then you can focus in on one critical choice and optimize. Until then, focus on making solid decisions and you’ll make all the progress you need. You’ll probably be a lot happier too. Let’s talk about why.
Why Not Perfect Decisions?
Too often, people get fixated on the need to make a perfect decision. They’ve hit an awakening point and are ready to take charge of their life. Since they were making “bad” decisions before, now they’re going to make good, perfect, or optimal decisions.
Committing to make only perfect decisions is like a poor free throw shooter deciding he’ll make every shot. Going from 40% to 100% isn’t necessary – or possible. Improving to 80 or 90% would have a dramatic impact on the game.
Aspiration is good. Unattainable is not. Let’s look at why the search for optimal decisions isn’t worth your time.
Impossible – Hindsight is 20/20.
First, let’s talk about the obvious. Perfect decision-making is impossible. We all know the phrase “hindsight is 20/20.” It exists for a reason.
In order to make a perfect decision, you need perfect information including the eventual outcome of a decision. The more complex the decision, the less likely that is. And unless you can actually see the future, outcomes are often impossible to determine in advance.
Even a relatively simple decision has hidden complexity. Let’s talk about a dark room and a light switch. You need light in the room, the decision is clear: flip the switch. Almost always this will be the right decision. Yet, there will be times when the switch is broken and either fails to engage the light or worse, shorts and starts your house on fire!
In hindsight, lighting your house on fire to provide a little illumination to avoid stubbing a toe isn’t an ideal choice.
Yet, we continually strive to be sure our decisions are perfect in a world of randomness.
Let’s talk about why trying to tie too much certainty to our decisions is harmful to our progress.
When we assign value labels to our decision-making it immediately ties in our sense of self-worth. Combined with resulting, or tying decision quality to outcome, this is dangerous.
If decisions are good, bad, perfect, horrible, etc then the outcomes of those decisions mean we are those things. This adds further emotion and increased stress into our decision-making.
It’s one reason I prefer striving for “solid” over perfect, or even the less loaded “good decision.” For me, solid reflects the idea that I’ve taken the steps I need to be reasonably confident about my decision, without tying the outcome to my self-worth.
Failure / Shame
Related directly to the previous, if we believe we did everything we could to make a perfect decision but it didn’t work out, it can lead to a sense of failure or shame spiral.
Your self concept can quickly swing from positive to failure. You decide that your best simply isn’t good enough. How could you blow it so badly?!
Better to believe that no decision can be perfect, and instead strive for solid. Then if it goes badly, you’ve left yourself room to accept negative outcomes. (And they will happen – more on that later…)
Striving for perfect decisions leads directly to analysis paralysis. You might be 90% of the way to a decision, but agonizing over the last bit. In order for it to be perfect, you need more information. Every calculation has to work out. You need to know it’s the only right choice.
You’ve probably seen this when someone is stuck trying to decide what to order off a menu, or deciding between which of two shirts to buy. Those moments are frustrating, but relatively inconsequential.
However, if it’s a decision on which debt to pay off, whether to invest, or the difference between interest rates, it matters significantly more. The decision is important and deserves real consideration, but perfection can cost you time.
Time is more valuable in financial decisions than we often consider. Every day you hold off on paying a debt is more interest accrued. Missed investment time is a lost opportunity for compounding growth or an opportunity gone by.
Inaction is a cost we don’t often factor into our decision-making choices. Striving for perfection often leads to doing nothing.
Doing nothing is a decision. Sometimes it might be the right decision, but it shouldn’t be made by default.
If you’re convinced you’ve made a perfect decision, you are more likely to hold onto it even if the result doesn’t warrant it. Your conviction causes you to be stubborn and stick with something even when you should cut your losses.
You’re more likely to throw good money after bad. You’ll ride that “sure 10 bagger” all the way to the bottom. After all, your decision was perfect!
This is the biggest downside of believing you can make a perfect decision. You’ll stick with something (or someone), even when new information tells you to get out.
Make Solid Decisions – Good (Solid) is Good Enough
Good is the enemy of great.
That quote from Jim Collins’ excellent book Good to Great (affiliate link) is one of my favorites. The idea is shooting for, or settling for, merely good prevents you from achieving great. As I work to build excellent schools that serve all students, it’s true.
But in decision-making it’s not. Striving for a perfect (or great) decision will limit you in ways that accepting a good (or solid) one will not.
Here are some of the benefits of shooting for solid decisions:
When you’re striving for perfection, you’ll be more hesitant to act. You might be frozen by analysis paralysis, or simply take far longer than you need to.
Now, even with my admitted bias for action, I’m not recommending hasty or bad decision-making. However, I am recommending that as soon as you have a solid decision, you move rather than waiting to be perfectly sure.
You’ll act more quickly thereby seizing more opportunities.
Accepting solid decisions means when your decision is wrong, as it sometimes will be, you use it to do better going forward. No shame or failure, just a teachable moment.
You now have the opportunity to learn from an actual outcome, instead of a theoretical concept. What went wrong? Was it your decision-making or just circumstances? How can you approach it differently next time?
By acting on solid decisions and then learning from the outcomes, you’ll improve your decision-making!
You’ll also get a lot better at adapting. If you’ve made a solid decision, you know what you expected and how it might go wrong. Now you have a chance to adapt – either the next time you face a similar decision, or by adjusting your initial decision according to the initial outcome.
Most true progress comes from iteration, not from flashes of brilliance. Accepting solid decision-making gives you more chances to improvise, adapt, and overcome.
You’ll improve more quickly than if you agonized over every decision until convinced it was perfect.
If being wrong creates so much learning and opportunity to adapt into brilliant things, why don’t we just jump on our first decision?
While I’m advocating you to stop chasing perfect, I’m absolutely not saying you should embrace hasty or reckless decision-making. There is plenty of ground between perfect and foolish.
A solid decision allows you to limit the downside. If failure is death or destruction, there is no learning and iteration.
A solid decision leaves you in a spot to harness the benefits of action, learning, and adaptation by avoiding or mitigating the worst outcomes.
What Goes Into Making a Solid Decision?
Have I convinced you yet about the benefits of embracing solid decisions over the extremes of perfect or reckless? I hope so.
Let’s look at what goes into a solid decision.
Look at me throwing this out here like it’s easy. It’s not. It takes time and will be a continual process. But, part of solid decision making is realizing we have flaws, biases, triggers, and strengths.
I’ve realized I have a bias for action. Financial insecurity has warped my relationship with money. Fear can paradoxically both hold me back and cause me to act when I shouldn’t (in order to resist it.) I have to constantly strive against a natural cynicism. I’ve spent years coming to these understandings. I may be entirely wrong about some or all of them.
Too few of us take the time necessary to understand our own minds and emotions. What you think you understand at one moment, may shift in the future. Honestly assessing ourselves is hard. Much like a decision, we’ll be wrong sometimes. That’s okay. Just continue to reflect. It’ll pay off over time.
Don’t rush into a decision. While we want to avoid inaction and there is a benefit to moving you still need to give yourself time to consider the decision.
Yes, I’ve read Gladwell’s Blink. And yes, I believe that hunches are worth considering. I also know that emotions can cause chaos in our decision-making. Especially fear.
Often, you won’t even realize the emotional component of the decision if you act quickly. Time is about giving ourselves the space to mitigate the impact of strong emotions on our decisions.
The more consequential the decision, the more time you should take.
Want a simple example that we’ve almost all experienced? The 24 hour rule on angry email responses – waiting a day before pressing send. Waiting that extra time has saved me from professional suicide many times!
Another example – investment policy statements often impose time between investment decisions to mitigate emotion.
A solid decision requires that you gather the information you need. You don’t need to over research, but you do need to understand the choice in front of you.
What factors will determine success or failure? What are the potential outcomes?
If you can’t understand the choice then you need to either invest the time to understand or walk away. Decisions made blindly are not solid decisions.
Never invest in something you don’t understand. True for life and money.
Realistic Risk Assessment
A solid decision requires you to conduct a realistic risk-assessment. It’s one reason the research is so important.
Once you know the possible outcomes, how much are you risking? Is the worst-case scenario an acceptable risk for the potential upside?
Don’t just compare the best-case scenario to the likely outcome while ignoring the worst-case. Likewise, don’t do the opposite. Understand what the real risks are.
Your Risk Tolerance
A subset of the risk assessment is an honest assessment of your own personal risk tolerance. A risk of $100,000 may be tolerable for some and completely unacceptable to others.
Only you can determine your risk tolerance. Do your best when in a non-emotional state to understand what you are willing to lose if a decision goes against you.
Expect your beliefs about your risk tolerance to be tested when things really go wrong. Then use that to calibrate for the next time.
Expectations of “a Miss”
Making better decisions starts with understanding this: uncertainty can work a lot of mischief.
This quote from Annie Duke’s Thinking in Bets has transformed my decision-making. It’s obvious, and captures why perfect decisions are a futile pursuit.
It also requires you to integrate the expectation of a miss into solid decision-making.
A solid decision includes the assumption that things can go wrong. Despite adequate time, research, and risk assessment our decisions will sometimes be flat out incorrect.
This frees us up to learn and take advantage of the possibilities of iteration. It also requires that solid decisions include an…
Exit or Adjustment Plan
If it’s possible that any single decision can be wrong, and certain that some of our decisions will miss, then we better be ready.
A solid decision includes a plan for adjustment or exit when things go badly. How will you respond when that stock you were certain was about to 10x instead drops 50%? Will you exit, stay the course, or put more money in? Make that plan before it happens so you aren’t responding in the emotional moment of loss.
How about that rental property that suddenly sits vacant for three months? How will you adjust?
A solid decision doesn’t assume things go smoothly. It anticipates how they won’t and plans accordingly.
Examples of Solid Decision Making
I opened by admitting I’ve made tons of bad decisions. Yes, I used the value word of “bad” because at the time I wasn’t striving for solid and in hindsight they were flat out wrong. I catalogued my biggest financial mistakes after 45 years.
I’ve been fortunate that some of them worked out through pure luck. Others were bad, but not catastrophic. And some, I can see now how the big bad decision was backstopped by solid decision-making.
Let’s look at a few of those first, then some other examples of how I’ve tried to improve toward solid decision-making.
Bad Decisions Mitigated by Solid Decisions
I’ve written about lifestyle inflation as our biggest mistake – by far. Expanding our spending to match our income for more than a decade cannot be defended. Yet, we were able to recover from it because of some other solid decisions.
First, we took action early in our careers to pay off our consumer debt. We spent almost two years intentionally paying extra to eliminate credit card and other high interest debt. This meant that we weren’t carrying the anchor of heavy interest. It also set the foundation so even while our lifestyle inflated we never entered extra consumer debt. Avoiding high interest debt is a solid decision.
Second, we grew our careers and increased our income. We had more income to spend because we focused on making more money as educators. Combined with avoiding debt, this meant we were able to course correct quickly once we woke up. It’s enabled us to go from clueless at 40 to nearly financially independent just a few years later. Increasing income when possible is a foundational solid decision.
Finally, we spent on experiences and things we valued. This can be a justification for stupid spending as well, but in our case it allowed us to further improve our life. Buying a nice house in an expensive area allowed us to understand what we valued and didn’t in our primary home. We travelled extensively, and can now define what is important to us (views) and isn’t (luxury.)
Lifestyle inflation was a mistake. Yet, we’ve used the components of that mistake to learn and define our future in a way that powers our new solid financial decisions.
Too Big a House
Another big financial mistake – we left our small starter home to buy that much larger, more expensive home in a high tax area. Absolutely the wrong choice. Yet it was backstopped by the following solid decisions:
We bought at the bottom of the market. Now, we didn’t know at the time we were doing it (market bottoms are always hindsight), but we were only willing to buy the house because prices had dropped 40% from the highs in 2007/08. We were lucky to see prices rise almost instantly from the day we bought the house until the day we decided to sell.
We could afford the house. We didn’t stretch to buy it. We could pay the mortgage without worrying about debt or financial failure. Even at its highest point, it was just over 30% of our income.
We kept the previous house and turned it into a rental, avoiding the transaction costs of selling. Having tenants enabled us to continue paying the mortgage and even cash flow a bit. It also meant the house was available later when we decided to move back into the rental.
Again, some solid decisions underneath a big mistake meant we didn’t lose big. It may not have been optimal, but ultimately it wasn’t financially catastrophic.
Solid Decision Examples
Here are a few examples of intentional solid decision making.
When we finally decided to get rid of that expensive house, we approached it intentionally. We took our time. We made a list of the pros and cons of downsizing our home. We searched for the right smaller house with a clear list of criteria important to us.
Once we decided to act, we acted quickly and sold quickly for a good price.
We also chose to rent for a year just in case we were wrong about the smaller place. That worked out well, since we pivoted again a year later.
Time, research, risk assessment, action, and plans for a miss. It allowed us to reap unexpected benefits.
403b vs 457b
My exploration of investing in 403b vs 457 is an excellent example of solid decision-making. By walking through an established framework I do my research on available options, exclude ridiculous fees, include future goals, and prioritize according to future goals. At the end, you have a solid decision you can adjust going forward if any of the information changes.
In our case, we’re fortunate to be able to max both products to the 2020 contribution limits. In the future that won’t be the case, but the solid decision making approach will give us an outcome that’s good enough to act. It’s better than not using viable products because we’re agonizing over a perfect decision.
Earlier this year, we decided to pay off the rest of our mortgage. The decision to pay off a mortgage or invest is one of the most-debated topics in personal finance. Most would argue there is an optimal decision.
If you know the future, there is. Otherwise, the optimal decision depends largely on your assumptions and personal preferences. It’s easy to spin forever trying to make this decision.
Instead, we chose mortgage freedom by following our process for a solid decision. For us, the balance of sure savings (future interest), lower monthly costs (no housing payment), and increased feelings of housing security was worth it.
A few years from now, it may turn out that we’d have been mathematically better off by investing rather than paying our mortgage off several years early.
We are comfortable with our solid decision. In fact, we’re thrilled being mortgage free.
Summary – Make Solid Decisions
It is impossible to make perfect decisions. Trying to do so will ultimately cost you more in the long run. Instead, strive to make solid decisions by:
- Understanding yourself
- Giving yourself time
- Doing your research
- Honestly assessing risk (and risk tolerance)
- Assuming you’ll be wrong sometimes
- Having a plan to exit or adjust
You’ll give yourself the chance to seize more opportunities. You’ll avoid staying in and taking catastrophic failures out of stubbornness.
Quit agonizing over perfect decisions.
Just make solid decisions. You’ll make more progress and be happier.