How do you know whether a decision is good or bad? What factors should you consider? How can you make better decisions? Let us explore these questions.
Whether a decision is good or bad depends on what your goals are. A decision may be bad relative to one goal and good relative to another. For example, if you play blackjack at the casino with the goal of winning over the long run, that’s a bad decision. The house has a statistical edge and you’d be playing a losing game. However, if your goal is to have fun and set a budget for your entertainment, that can be a good decision if it helps you blow off some steam.
We should divorce the value of a decision from its outcome. Few decisions lead to deterministic outcomes. Most decisions produce probabilistic outcomes. Therefore, we should assess whether the decision is good or bad based on the decision alone, and not on the outcome. For example, losing a pre-flop poker all-in with AA against 72o does not mean that you made a bad decision. You were an 88% favorite to win the hand and it’d make sense to make that decision again if you’re able to.
Decisions should consider your risk tolerance. If you were offered a wager where you could bet all of your life’s earnings to have a 90% chance to triple its value and a 10% chance to lose it all, whether you take the wager or not depends on your risk tolerance. The expected value is positive, but the possibility of going bankrupt may not make the bet worth making.
If you have the opportunity to take many shots on goal, then your risk is diminished. If you could make the previous wager by betting 1% of your earnings an unlimited number of times to have a 90% chance to triple its value and a 10% chance to lose that 1%, it’d be worth making that bet because your downside risk is limited. Having many shots on goal makes it a good decision.
Experimentation, collecting data, and learning are usually good decisions in a long-term game. When you have many shots on goal and you’re uncertain what the optimal decision is, then mapping out a decision tree and getting feedback on what works and what doesn’t can be a good decision. A bad decision would be to dive deep down one path without knowing whether there are obviously better alternate paths.
A good decision makes future decisions easier to make. A bad decision makes future decisions harder to make. Good decisions compound over time. For example, in chess, if you move the king bishop pawn in the early game, which is an essential piece to protect your king, you make it challenging to keep your king safe. This makes all of your future decisions harder to make. Meanwhile, moving another piece that keeps your king safe and allows you to develop your pieces can make it much easier to protect your king, allowing you to make easier subsequent decisions.
Good decisions may not move you immediately closer to your goal. Bad decisions, on the other hand, may appear to move you closer, but actually lead you astray. For example, if you’re trying to climb to the top of a mountain, blindly going up may lead you to the top of a hill—a local maximum. We should not confuse moving up with making progress. If we are at the top of a hill, we must go down first, then find an alternate path to the top of the mountain.
This is not a complete analysis of what makes a good or bad decision. However, if you are attempting to consider these types of thought exercises in your decision-making process, it’s more likely that you’ll make a good decision. At the end of the day, good decisions produce more good decisions. So the more you practice making good decisions, the more likely you’ll make good decisions in the future.
