The Most Important Thing
The most important people in the world all have the same job. Whether it is top statesmen, business leaders or financiers – they are all paid to make decisions.
Q1 2021 hedge fund letters, conferences and more
Yet why is it that we make great decisions sometimes, and terrible ones at other times? In recent years I have become fascinated by decision science – why we make the choices we do. There is so much more to it than most of us realise.
Three Revolutions
Decision science was pioneered in the 1970s by Nobel Prize winners, Amos Tversky and Danny Kahneman. They developed theories around behavioural biases. These are mental short-cuts we all make that can lead to flawed decision-making. Often these are caused by how we are presented with information or the environment we are in. Since then, hundreds of behavioural biases have been identified.
Then, in the 1990s, pioneering work was done on neurochemistry. We began to understand how neurochemicals like dopamine and cortisol can affect our behaviour, driving everything from greed to fear, and addiction to depression.
Next came the Information Revolution. The expansion of the internet and computing power has literally blown our minds. As I have written about before (The Essence Of Value Investing And Why Many Struggle), these new media and the sheer quantity and speed of information are having enormous affects on our decision-making; exacerbating behavioural biases and neurochemical imbalances. That means more conflict, more short-termism, and more boom and bust.
The Biggest Problem in the World
Put all this together, and we’re using decision-making machines that were designed for the hunter gatherers of 10,000 years ago, but totally unsuited to the modern world. Everything from diet, technology, and even the nature of today’s problems can short-circuit our brains. The result is a global pandemic of terrible decision-making at every level of society.
We can see the consequences everywhere we look. The major problems of today are simply worse versions of the problems we faced a decade ago, in spite of all the new technologies and the resources we’ve thrown at them.
So here’s the thing: we aren’t going to get rich, solve climate change, reduce poverty, or achieve world peace if we cannot fix the quality of our decision making. This is the prerequisite to everything.
Time to Experiment
I spent fifteen years working in finance and investing for my own account. A combination of some good decisions and good luck meant I was able to retire outright while still in my 30’s. Looking back, what fascinated me was how sometimes my decision making was spot on: clear, calculated, incisive, and differentiated. But other times it was a mess: panicked, flawed and poorly thought through.
One of the most interesting quirks is that my best investment decisions were made sat in my back garden, not in the office.
Now I have a young family and my wealth is dependent wholly on my investing success or failure. Decision-making is the thing I have to get right. I’ve spent the past year experimenting, with the aim of designing the perfect day for decision-makers.
Here is what I have learnt so far.
The Power of Routines
One of the great lessons of those who have thrived during lockdowns and working from home has been the importance of creating and sustaining routines.
By following routines you gain a sense of control. This is especially important if you are working around family or children. Routines give us boundaries.
By following routines, you can also build good habits, such as regular exercise or healthy eating. By building things into a daily routine, they go from being a chore to a welcome part of the daily rhythm.
Here’s another great tip. When designing your routine, put the mentally challenging tasks in the morning and the physically demanding tasks in the afternoon. In the morning your brain is fresh and less prone to mental shortcuts, distraction or just exhaustion. In the afternoon, your body and muscles are warmed up, and better primed for exercise.[i]
If you’re struggling, look for small wins
When you’re diarising your routines, make sure there are some small wins in there. These are just little, tangible achievements you can tick off every day.
It has been shown that when people face big or overwhelming tasks, breaking the task up into tiny, tangible goals, makes people far more likely to succeed; and it keep them happier and more motivated[ii]. Further, it has been found that what matters to worker’s motivation more than anything else was regular small wins.[iii]
When people feel overwhelmed or in real difficulty small wins are the way out. Many psychologists will get struggling people to diarise things like getting up, eating breakfast or taking a shower. Just ticking them off builds confidence, gives the brain a positive dopamine kick and creates a sense of control, setting us up for bigger achievements.
When You Are Working...
It has long been known that too much information leads to worse decision-making, especially when it exhausts us. Take the time to Cut out information flows wherever possible. Limit screen time and unsubscribe from mailing lists. The best way to do this is zero-cost budgeting. Start with no incoming information and work back to what you need.
You also need to consider the order in which you analyse information. For investors this is particularly important. For example, I always go through company financials before speaking to brokers or reading the news, as that can leave you blinded by the hype.
In this regard, building checklists can be a huge help. They ensure you go through all the stages in the right order without missing anything, and they greatly speed up productivity.
From using the above tools, what I have found is that really good quality work actually takes very little time. I spend about two hours a day on investing, and feel far more insightful and knowledgeable than when I was working full time. I just don’t waste time gathering confirmatory information, ploughing through emails or being distracted by irrelevant things.
Less time has other advantages too. It turns out workers who work less than forty hours a week get more done than those who work more![iv] This is because tired workers are slower, get distracted, and have to spend more time fixing mistakes.
Lastly, be sure to use some of that time you save to self-monitor. One of the problems with challenging jobs is that we spend all our time on just getting the work done without pausing to think how to do it better. So diarise an hour every week or two to monitor your work and seek specific feedback from colleagues. Try and make one small improvement each time, and you will find they soon start to compound.
Keep Learning
New York Investor, Irving Kahn, who died at the age of 109, was still happily working a three day week right up to his death. When asked what his secret was, Kahn responded; ‘To wake up every morning and have something to look forward to. The important thing is to keep that brain going.’
A commitment to lifelong learning not only means we can keep improving, it keeps our brains active, and it enables us to think more laterally and creatively. The more I read, the more I feel I understand the world. Again and again, I have found random information I have picked has come in useful when I least expect it. From Warren Buffett to George Lucas, it is almost impossible to find a really successful person who does not read every day.
So I make a commitment to read for an hour every day. By reading I mean paper reading (without the distraction of the internet). And it can be anything apart from news or work.
The last three things I read were a teen fiction novel set in the 17th century, a book about trees, and the technical manual for a tractor mower!
I also take time to write every day, again on paper. Sometimes creatively, sometimes journaling, sometimes just drawing mind-maps. The process of writing and mapping helps us remember things, to order them, and to see new connections.
As well as reading and writing, you need to make sure you’re constantly stretching your brain by using the bits many of us neglect. So I also routinise time each week to learn a new skill. The idea is to try things that are totally different from work, expanding and stretching my knowledge and abilities. For example I’ve done Poetry, Upholstery and Dance courses. Music and Languages are also great. The aim is to keep being surprised and keep that brain growing.
Staying in Shape
First of all get outdoors whenever you can. It’s not only for the exercise. We are only just beginning to understand the psychological and physical benefits of spending time outdoors.
I do most of my investing in the garden. Just being there lowers stress and regulates neurochemicals. I can literally feel my brain thinking more concisely and creatively.
Walking appears to be particularly potent when it comes to creative thinking and problem-solving. Scientifically, walking has been shown to fire the brain thanks to the extra blood flow. From Wordsworth to Steve Jobs, a surprising number of the world’s greatest thinkers have been pathological walkers.
Taking meetings outdoors, often while walking, tends to be far more open and constructive than in a stuffy office room. For anyone who has sat through hundreds of painful Zoom calls, you would not believe the difference.
There is also a new body of scientific research demonstrating that regular and intense exercise releases a cocktail of chemicals that stimulate growth of the brain, while fighting depression, stress and anxiety.[v] It doesn’t actually matter what form of exercise you do, as long as you push yourself a bit and do it regularly. Again, this is where routines really help.
Intense exercise is also one of the best ways to improve resilience. Throwing yourself at a challenging exercise programme is one of the most commonly cited cures among people who have recovered from major life traumas, such as cancer or family tragedies.[vi]
Sleep Hygiene
The effect of a lack of sleep on decision-making is one of the most well known cognitive failures. In fact, one of the earliest military strategies - used for at least 3000 years - is to try and deprive the enemy of sleep before battle. Recently, a whole raft of high profile celebs have taken up the crusade for better sleep hygiene. It is not just about getting eight or nine hours, but ensuring you are actually sleep soundly. Not eating, looking at screens, doing work or drinking caffeine before bed are all vital. The hour before bed is a great time for reading. When you’re struggling, this is a nice ‘easy win’ to go after, because sleep hygiene is something we can all control.
Fix Your Diet
In a now infamous 2011 study of Israeli Parole Judges, it was found that how tough or lenient the judges were was closely linked to how long since their last snack break![vii]
Proof, if it were needed, that diet really does affect our decision-making.
And the trouble is that our modern diets are having an even bigger effect. Because we consume so much refined food and sugars, our blood sugar levels swing around like crazy, meaning we are in a constant cycle of sugar highs and crashes; affecting our moods and decisions.
I have been gradually switching to a more traditional diet, lower in processed foods and higher in slow carbs. This is often called clean eating. The health benefits are well known. But the effects on decision-making are also profound. You can literally feel yourself being calmer and more stable. Not only that, clean eating has been shown to slow cognitive decline versus diets that are high in refined sugars. Once again, you can make that old decision making machine – your brain - run better and for longer.
As part of an optimal diet, a good hearty breakfast is vital, and something more and more psychologists are prescribing. Just avoid high sugar cereals and juices.
One other thing I’m experimenting with are natural cortisol blockers, such as phosphatidylserine. Cortisol, is what causes our ‘fight or flight’ response, and gives you that jittery feeling after a fright. While the odd rush of cortisol is fine for emergencies, the effects of cortisol over prolonged periods of stress can be catastrophic. Chronic stress is linked to heart disease, cancers, depression and even Alzheimer’s. In a series of fascinating experiments by neuroscientist John Coates[viii], it has been shown to completely distort the ability to weigh probabilities and make rational decisions. There may be a day when every investor is taking cortisol blockers.
The Harvard Study of Adult Development has been running for over 80 years and is one of the biggest in history. One of the key insights is that people who live the longest and stay mentally agile into old age all lead active social lives. Specifically, they foster close and trusting friendships throughout their lives. It is too easy to mistake friendship with messaging people. But this is no substitute for spending quality time with the those you care about. Turning off notifications, avoiding email, and going for more face-time leads to deeper relationships and better communication.
Additionally, many creatives highlight the importance of really listening. That is, giving those you are talking with your full attention and listening in a non-critical way. For many of us this takes practice, but this is where new insights and ways of understanding normally spring from.
Meditate
The benefits of meditation have been written up everywhere. Study after study has found a few minutes of meditation a day improves self control and perceptiveness while reducing stress. For decision-makers, setting aside a few minutes to meditate is one of the easiest life hacks out there.
Make Time for Tidying
The creative writing coach, Dorothea Brande, recommended writers do some cleaning before starting to work. The idea being that ‘the rhythm, monotony and silence’ can produce a state of light hypnosis.
Jordan Peterson also recommends his readers begin by simply tidying their rooms. Meanwhile, Marie Kondo launched a global craze with her book, ‘The Life-Changing Magic of Tidying’.
As well as helping get organised, a little time spent tidying gives our brains time to think freely or creatively, and to organize our thoughts. According to Marie Kondo, it also compels us ‘to reset our lives.’ Having to decide what to keep and where, and what to throw out makes us consider how we want our futures to be.
Oh, and Don’t Forget...
...To always give yourself something to look forward to. Adopting new habits and routines can feel exhausting, so make sure to always have something booked - like a holiday, a day out or a trip to a favourite restaurant.
The Way of the Future
Modern research into behavioural psychology and neurochemistry have shown us how our mental biases and our environment can mess with our decision-making. Modern lifestyles and technologies have put those problems into over-drive.
The great thing is we can fight back. And the first step is adopting some of the routines and practices described above. If you look at almost all these tips, they do more than improve judgement. Most have also been shown to improve health, happiness and longevity as well. It turns out good judgement is linked to a good lifestyle.
However, this is just the start. I am going to make a prediction: the next crop of billion-dollar companies over the coming decade won’t be about more or faster data, but augmented human decision-making. Enterprises will emerge that redesign our environments, diets and lifestyles, monitor neurochemicals and hormones, and control our information flows to improve our decision-making powers. Then, we might really get somewhere.
About the Author
Andrew Hunt is a global deep value investor and author of “Better Value Investing: A Simple Guide to Improving your Results as a Value Investor.”
[i] Different effects of heat exposure upon exercise performance in the morning and afternoon - PubMed (nih.gov) [ii] [PDF] Small wins: Redefining the scale of social problems. | Semantic Scholar [iii] The Power of Small Wins (hbr.org) [iv] See e.g. The Overworked American: The Unexpected Decline Of Leisure, Juliet Schor. [v] Exercise as a Tool to Manage Stress (fs.blog) [vi] Resilience: The Science of Mastering Life's Greatest Challenges: 9781108441667: Medicine & Health Science Books @ Amazon.com [vii] Extraneous factors in judicial decisions | PNAS [viii] Cortisol shifts financial risk preferences | PNAS
