The Myth of the “Right Decision”

The Myth of the “Right Decision”

stock crashSometimes bad things happen to good decisions. A few years ago my husband found a car that he really liked, but he wasn’t sure whether he could afford it. This was a difficult decision because he’s retired and living off his 401(k). He has no steady stream of income, just some savings that have to last the rest of his life. What he can afford depends on unknowns such as how long he will live and what will happen to inflation and the stock market over that period. I offered to help him out. I made a financial model of his spending and assets over the next forty years, taking into account such factors as investment mix, mortgages and tax consequences. Then I ran it as a Monte Carlo model to examine the possible effects of fluctuations in inflation and the market. This was probably the most complex analysis of a car-buying decision ever made. Maybe it was overkill, but it convinced me that he could afford the car.

He was thrilled and went out immediately and bought it. The very next day, the stock market dropped more than 700 points and took much of his 401(k) with it. I was devastated. “You can’t afford that car. I was wrong! I made the wrong decision,” I wailed. For a while it knocked the wind out of my sails and made me question my decision-making abilities. I became overly cautious.

Eventually I snapped out of it. There was nothing wrong with the decision. It was thorough, took into account all relevant considerations and available information and balanced risk and reward. There was nothing else I could have done with what I knew at the time that would have made the decision any better. Nobody anticipated the Market Crash of 2008. This was a good decision. It just had a bad outcome.

Often people will laugh when I say “it was a good decision; it just had a bad outcome,” as though there’s some inherent inconsistency in the phrase. This shows how ingrained is our thought that a decision couldn’t possibly have been good if it led to a bad outcome.

Sometimes a bad decision will have a good outcome, but it’s still a bad decision. A while back, I read an article about a woman who had won the lottery and set up a charitable foundation in her name. While this is certainly better than what most lottery winners choose to do with their winnings, I was struck by the self-congratulatory tone of the article, as if to say, “My good decision in entering the lottery has allowed me to be generous.” The fact is that entering the lottery is a bad decision from a money point of view. There’s a greater chance you’ll be killed in an accident on the way to buy the ticket than there is that you’ll win. Maybe it’s worth it as a cheap form of entertainment, but financially it’s a bad decision. But every time someone has a good outcome.

The fact is that none of us makes just one decision during our careers or lifetimes. Of all the decisions we make, some will turn out well and others poorly. People who use good decision-making techniques will generally have more good outcomes than those who don’t. Focus on the big picture and accept that sometimes good decisions turn out bad.

I’ve seen the demoralizing effect of the “bad outcome = bad decision” myth on both individuals and companies. As happened to me, people will become afraid to make decisions, avoid necessary risks and shun innovation. They may even change perfectly good decision-making strategies in a vain attempt to avoid another bad outcome. Corporations will fire excellent managers who failed once because of unforeseeable circumstances, leaving a work force afraid to stray beyond rigid norms.

Every decision involves risk. There is no guaranteed “right decision.” It’s a balancing act and all part of the art of being an effective decision-maker. If you’ve never had a good decision go bad, either you are extremely lucky or overly cautious.

Have you had a good decision go bad?

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