Money Vault - How to make better money decisions

The Money To The Masses Podcast

Damien and Andy revisit a classic 2019 episode to discuss how focusing on a robust decision-making process yields better long-term financial results than fixating on short-term

Key takeaways

• Outcome bias causes investors to judge decisions solely by results, leading to loss aversion and compromise options that undermine long-term returns.
• James Montier's The Little Book of Behavioral Investing highlights how focusing on decision processes rather than outcomes produces more balanced, objective choices.

Main topics

• Outcome bias vs process-oriented decision making
• Loss aversion and compromise options in investing

Notable quotes

The correctness of a decision is determined by the outcome. Yet in that instance, all the facts were known up front.

Conclusion

Listeners are encouraged to abandon hindsight-driven judgment and instead build, test, and

Transcript preview

Speaker 2 (0:00) Hello and welcome to The Money Vault, our weekly show where Speaker 1 (0:02) we dig into the archives to give you one of our classic episodes from back in the day. Damian, welcome back. How are you doing? I'm good, Andy. And just before we get on with The Money Vault, just a bit of housekeeping, really. There's not going to be a Sunday podcast episode this week, so you're going to have to survive a few days until you get the following week's Money Vault. You'll still get a bit of us, but there won't be one this week. Sunday we're just having a mini break that is all so on to this week's money vault it's from episode 246 which goes back all the way to November 2019 so we're talking about nearly seven years ago and it is an episode that's all about how to make better money decisions and after we've played out this clip I'll come back because there's an update I'd just like to add that just shows what I was talking about, the importance of process. The power of process and decision making. Now, this piece is aimed at investing and also decision making more generally. So if you're not into investing, this is still relevant to you. But it's about decision making when there is uncertainty of the outcome. Now, when we make decisions, it's just us being human. We judge a decision whether it was correct or not. We have an outcome bias. And that means that we look at a decision and we look at the outcome and whether it was good or bad, a function of that outcome. So to give you an example, there was a book that was written called The Little Book of Behavioral Investing by James Montier. It's a very good book. If you get the chance, have a look at it. Lots of sort of snippets about investing and some of this stuff is about biases and about the importance of process. highlighted in there and he gives in that book and a very good example to highlight what i'm talking about if you imagine there is a surgeon for example and he may have a patient that comes to him with a series of ailments in terms of symptoms it could be they have pain that's stopping them being able to carry out their job or impair their life somewhat it's not life and death but it may be the fact he's having a very detrimental impact on their life and it could potentially maybe have some future bigger problems they decide to go and have surgery so let's say it was a surgery maybe on their heart or something but something that maybe is a bit more routine but with that operation that should hopefully improve the patient's life there is a chance let's say about a 10 % chance that that patient might die even if it was a smaller percentage now assuming that that patient has the operation, it all goes to plan, and the patient makes a full recovery, the decision of that surgeon to say, yep, do you know what? You need to go down this route and have this operation because your life would be better for it. That would have been deemed a very successful and correct decision and everybody would be happy. But of course, there is that 10%. If the person had died during that operation, then when they sat back in the cold light of day, Anybody who is looking at a decision might start to question it was a wrong decision because they might look at it and say, well, the person wasn't going to die from the issues they were having. Yes, their life was slightly more impaired, but now they're dead. And so what that is, that's the outcome bias. The correctness of a decision is determined by the outcome. Yet in that instance, all the facts were known up front. The outcomes were different. yet we have a different opinion. And so that is important when we come to investing or any types of decision making that we do. So we will always look backwards at a decision we made and say that was a bad decision because the outcome was something we didn't like. But that is wrong because if you focus on outcomes as a way of judging how good a decision was, it will start to lead you down a road of making almost... predetermined decisions so for example we take the investment world if you make decisions about where you're going to invest based on outcomes that you had then people start to move towards decisions that have loss aversion embedded in so that's a bias so you'll start to try and make decisions that stop you losing money because the outcome previously wasn't great or you start to opt for compromise options which means you start to pick things that are kind of middle ground and you're basically compromising you start doing things where you don't try and do something because it's right you just do it because it feels comfortable and you see that in fund managers it happens all the time there is a tendency for them to start to head towards being just expensive trackers and but as individuals that is the same thing we have the idea that when we try and make an investment we will start to move towards things that would be loss aversion or maybe compromise options that's not to say that it is a wrong decision it's the decision is questionable if it's based purely on an outcome so what you need to do is start to focus on a process because process tends to give better outcomes and now to give you an example of why this works. A process is where the way you make a decision follows a routine. So there is a way you do it. Now, there was an example that was given actually by James Montier, which was to do with two products. Imagine if you worked in a company and there were two products you were trying to launch in a new market somewhere. And so it might be in a foreign market. You had product A and product B. And you had to make a choice that you're going to put 10 million pound behind product A. or product B and launch it into this new market that you're trying to enter. If when you did that, assuming as part of this role play, that when the results came back from how well product