Decision FatigueI will be sharing learnings from the book titled as “ Four hour work week” , where in Author Tim Ferriss talks about the concept "Decision Fatigue"
Understanding this concept will help us improve the quality of our "high value" decisions, while reducing the number of "low value" decisions we need to make. We make hundres of decision in our daily life. 99% of our decision are low value decision. A few months from now, we probably won't care much about them or even remember them. But some are high value decision. Their impact on our life is for a long term.
The concept is really simple. He said that if you make too many decisions throughout the day, you're actually going to get decision fatigue and if you are in the stages of decision fatigue, you are going to make reckless, emotional, and perhaps even worse, you'll make no decisions at all.
In other words as per the law of Marginal Utilitywith each successive decision, our ability to make the next decision gets worse each successive decision contributes a bit of stress and all this stress adds to the "cognitive load" we carry in our minds. And as our cognitive load gets heavier, our ability to make good decisions gets reduced.
I thought about how this concept going to apply to me or in Investor's life.
Investing is a high-value decision which in itself involves too many decisions. The more decisions we are taking in a short span of time to invest or exit in various financial instruments the probability of taking a wrong / non-efficient decision goes up.
For example, it is difficult to efficiently invest in 10 different stocks in a short span of time compared to one stock where you have more information and conviction.
If you think about all world-class performers, they have some form of routine or checklist that they go through to automate the things that they need to do every single day
And like a pilot who is about to take off with maybe 200 – 400 passengers under his care, every single time, no matter what, they go through a checklist to make sure everything is ok and to make sure that they can take off safely.
Well, all investors need to do the same thing as well because it's not easy to invest in equity because there is so much information out there. There are blogs, articles, and videos and people can easily get overwhelmed by what they need to do leading to decision fatigue.
If they are making decisions when they're in decision fatigue, they will make reckless and emotional decisions, or worse they might even procrastinate. So there are some things that you need to master when it comes down to equity investing or investing in any other form.
Every investor needs a checklist to take any decision.
Check-list can include four key areas: Individual Asset Allocation level / expected Liquidity flows / already established hypothesis for a particular stock and mutual fund / Risk and return expectation or risk profile match with your goals. These are broader areas, the checklist can include many other things as per the individual.
Your checklist of investment should automate and help you to take as less the decision as possible in future to create a successful portfolio.
For example, my checklist ensures ensure I do not end up with too many mutual funds and stocks in my portfolio which I can not effectively track.
I have seen investors investing too little in too many stocks which they can not track and all they have is hope for good returns in their portfolio.
Every time you are going for a new decision of investing or exiting any financial instruments you need to go through your self-made checklist to avoid any reckless and emotional decision.
So like all world-class performers, you really just need to have an awareness
around this.
I guess the important point to note here is Investing is actually a process, it's not an event.
I will leave you here with a quote - “A good process produces good results”.
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