Avoiding the Big Mistake

Key Takeaways

  • Research shows our decisions are too often clouded by biases and irrationalities.
  • There are four primary causes of human error: confirmation bias, emotion, tunnel vision and overconfidence.
  • There are four key steps for overcoming your biases (see post below). Sometimes the answer is right in front of your nose.

When you look at your life, you realize you have probably made some big mistakes—hopefully with small amounts of money or minimal physical harm. No one sails through life mistake-free or regret-free, but it’s about more than just being lucky. In their new book Decisive, authors Chip and Dan Heath take a good look at four big reasons we make mistakes and misjudgments.

Four causes of mistakes

  1. Confirmation bias. We’re so convinced about something that we find all the information we can that supports our position, our theory and our hypothesis. But we don’t look at the alternatives.
  2. Quick emotional reaction. We feel that we have to act on something ASAP, and we rush into hasty decisions that come back to haunt us.
  3. We have blinders on. We have such a narrow focus on something that we neglect to take in all the other information and variables that could help us make a better decision.
  4. We are just so sure we’re making the right decision that we don’t consider any obvious information or alternative points of view that could prevent us from making a big mistake.

Four keys to better decisions

  1. Widen your options. Big decisions are not simply about toggling an on-and-off switch. You’ve got to step away and look at multiple approaches and variables to come to an important life decision.
  2. Have a reality test for your assumptions. Again, that’s about avoiding confirmation bias. Make sure you’re not simply confirming things you already believe to be true. Make sure you’re not looking only for information that supports that position.
  3. Attain distance before you decide. Take a step back and allow yourself to be free of emotion, and detach yourself from the situation at hand. That’s very hard to do, but it’s a really great way to get to that next step.
  4. Prepare to be wrong. Use the “bookend” approach. I’ve spoken to many people over the years about when to unload a particular stock. By putting a hard sell price above and below a target price, you’ll avoid falling into the trap of wishing for more upside or hoping you’ll get back to the break-even point after the stock takes a dive.

When it comes to retirement planning, estate planning and family money issues, seek advice from a range of people you can trust. Certainly, you can come to us or to your advisors, your attorney, your accountant, your wealth advisor or others you trust to help you think through life’s big decisions with a full and balanced perspective that can help you avoid big mistakes.

Until next time, enjoy.

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