Jan 18

Jan 18 Decisions decisions decisions

TLDR: Decision making and its impact on investing

If I were to ask you to provide an estimate of how many decision you make on a typical day, what would be your answer?

10, 50 or 100? What is that number like? The number is more like 35,000 a day. That sounds incredulous, doesn’t it? From the time you decide to wake up or snooze the alarm for one more time, decide whether to shave or not today, to what breakfast to eat in the morning. Our brain is constantly having to make decisions all the time.

Yes, most of it will be around very mundane things which we don’t really have to put a lot of thought into. But be it work or at home we do have to make some important decisions every day. That number is definitely much lesser but still close to 50 per day at a minimum.

There is an interesting research paper that was published around this very topic which is called “Decision Fatigue” which discusses this topic in lots of detail. But the gist of it is that we have a certain limit or tolerance for the number of decisions that we can make in a day. Like a charge in the battery.

Each decision that we make, depletes a little from the battery and by the end of the day the charge on your decision battery is depleted and your brain acts like an iPhone on its last legs. And if we are pushed to make even further decisions then our brain takes shortcuts and does a poor job of analysing the information and we end up making hasty decisions.

How is it related to investing?

Simple! An investing decision - buying/selling stocks, bonds, mutual funds, ETFs, land, gold. Whatever be the asset class, is an important decision. You have a specific goal in mind which leads you to make that purchase or sale. But when you are suffering from decision fatigue from the daily rigmarole you might end up making poor decisions.

Buying or selling early or late
Not choosing the right fund
Rushing into a land / apartment deal

And these decisions can prove to be costly mistakes.

What is the better way?

Sleep on it

If you need to make a decision that you think is critical, sleep on it for a day/ week whichever duration feels right. Go at it with a fresh start the next day early in the morning when your decision charge is at it fullest.

Automate it

Instead of choosing to buy a stock / MF / ETF on a week to week or monthly basis, automate the whole thing. Create SIP / SEP / STP as required so that you make the decision only once and the automated schedule takes care of the rest without you having to make the decision every time.

Simplify it

Investing has its own challenges. Don’t chase fads. Old fashioned investment philosophy of “Buy and hold” still works. Index investing, value investing and quality funds still work. The more complicated the product or investment strategy the more analysis and research needed to understand and implement it. Stick to the basics and follow the KISS (Keep It Simple Stupid) principle.

What are your automation strategies ? How do you reduce your decision fatigue?

Leave your comments below.