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Chapter 1: Why is making better financial decisions important?
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Please remember that all of the information in this podcast episode is limited to general information only. That means the information is not specific to you, your needs, goals, or objectives. So you should seek the advice of a licensed and trusted financial professional before acting on the information.
And before you acquire or apply for a financial product, please read the PDS or product disclosure statement, which should be available on the issuer's website.
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Chapter 2: What is 'resulting' and how does it affect decision-making?
Lastly, please keep in mind that past performance is not indicative of future performance. Kate, welcome to this episode of the Australian Finance Podcast.
It's good to be back, Owen.
It is indeed. We are talking about decision-making. I think it was a good decision that we did this today, although we are running out of time. We're actually recording two podcasts on this Thursday, so hopefully we don't rush this one because rushed decisions probably aren't a good thing, right?
No, no, sometimes, but not always.
No. So tell us, Kate, why are we talking about decision-making today?
Yeah, well, last year I read a new book called How to Decide by Annie Duke, and it really made me think, much more deeply about my own decision-making processes and why I believe it's so important to improve our own financial decision-making.
And some of the financial decisions we make are going to be the biggest and most impactful decisions we make in our entire lives, along with maybe decisions like your career and your maybe when to start a family or anything like that.
So I think it's really important that we actually spend a bit of time talking about improving our financial decision-making skills because I don't think that's something we talk about too often.
No, no. And as we're all about to find out, it's not as easy as this was the decision that I made. This was the outcome, which is what so many people do. They kind of just draw a straight line between what happened and assessing that result today. So it's a bit of an interesting one.
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Chapter 3: How can you build your own decision-making framework?
And I think it applies, and there are many examples, it applies to investing. And we'll see as we go through, I'll provide some ideas around how you can think about this and some of the ways that you can make better decisions when it comes to investing your money. And then you'll talk about some of the ways we think about it in a personal finance context too.
So one of the things that was made really apparent from Annie Duke's book was this idea called resulting. Do you want to explain what that means?
Yeah, absolutely. So Annie talks about resulting as in when you make a decision, you often evaluate the quality of the decision based on the outcome. So she provides some examples in the book, such as you decided to go out without an umbrella today. If it rains, you think that was a bad decision. And if it doesn't rain, then you don't even really worry about it.
You made a good decision not to take the umbrella with you. So You, I mean, the decision not to take an umbrella was one decision you made, but you're evaluating the outcome of that, well, the quality of that decision based on the outcome rather than the process that led you to the decision itself. So that's, I mean, that's a really simple example to think about, but yeah.
She talks about how that's really the wrong way to think about the quality of your decisions because it stops you actually thinking about the process that led you to make that decision.
And if you, I guess, apply that to really large decisions like what you're doing with your money and your finances, if you're just every time you're only learning if your decision was good or bad based on the outcome, you miss out on a lot of lessons of what led you to make that decision in the first place.
So this is a good one because let's say you live in tropical northern Queensland and it is rainy season. There's probably an 80% chance that it rains every day. So if you go outside with your umbrella, you decide to take your umbrella and it rains, that's a good decision. But if you go outside and it doesn't rain and you've got your umbrella, well, you probably didn't need it.
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Chapter 4: What are common pitfalls in financial decision-making?
So that's not necessarily a good decision, right? But that's not necessarily true because there was an 80% chance regardless of what happened So this is a really good way to test our thinking. And I think she says she drew this picture in the book, which is you have outcome in big words in the middle of the page.
And then in the shadows behind it, there was kind of like the decision-making process or the result. And effectively, we let that guide our decision-making and whether that was a good decision or not. And we see this in investing all the time. you might get some punter on Reddit or on Facebook who absolutely knows nothing about investing.
They're an absolute rookie, but they're quite happy to give everyone their advice on a stock. the stock that they recommend is some crappy small company from Australia does mining. Maybe it goes up 10 times. And all of a sudden that person is a superstar on Facebook and Reddit, right? Because of that outcome.
But really the chance of that happening is probably one in a thousand or one in a hundred, right? And they just happened to make that right call. But all of a sudden, we apply this kind of label as great investor according to this person who probably doesn't deserve it. So I think we see that all the time in investing and we see it all the time on Facebook.
That's why when we talk about investing returns, we say, look at the longer term time horizon here because you might end up resulting, you know, your super fund based on one quarter's performance, based on one month's performance when that stuff's really random. So this brings in a really important point, Kate, then.
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Chapter 5: How can analysis paralysis impact your financial choices?
why is it important for us to consider improving our decision-making skills?
Yeah, so I think sometimes we can make excellent decisions and they turn out poorly or we can make really bad decisions and for some reason you just get lucky and you end up with a really good outcome and that means we can sometimes learn the wrong lessons. And it doesn't mean that that process is repeatable.
So you might have, yeah, as Owen said, got a stock tip off a mate and for some reason you invested it, put all your money in and you, I don't know, your investment went up 100% and you think that that result means that you should do this again and again and again and repeat that process. And a lot of the times that isn't repeatable. So I think it really forces us to look back and go,
actually, we need to think about our decision separate to what the result was. And that's what Annie talks a lot about in her book. And one of the things she suggests doing is evaluate the results and evaluate the decisions. So listing the reasons why you had a good or a bad outcome despite a good or a poor decision-making process. So
What are some of the things that happened inside or outside of your control that you didn't anticipate? And one of the ways to do this practically is the next time you're going to invest in a share or ETF, just to bring it back to investing, actually writing down the reasons that you're choosing to make that investment. Or let's say you're choosing to... Buy Bitcoin.
yeah even if it's something that you think maybe you shouldn't be doing writing down the reasons maybe three or four why you've chosen to make that decision and then once you sort of the outcome sort of plays out sometimes it takes many many years for an outcome to play out but you can try it out with sort of shorter time frame decisions as well you can actually look back and go
What was the outcome and was it a good or a bad outcome and would the decision-making process I made change now that I knew the outcome? And so you can actually go through how did I make that decision and was it a sound process and was it directly correlated to the outcome?
One of the things that jumped out at me when I read this, Kate, and just again now you saying this, writing it down is really important because there's something that happens after the outcome occurs. Like when there's a result... we tend to have, you know, you can call it whatever you want, maybe like recency bias.
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Chapter 6: What steps can you take to improve your financial decisions?
You could call it outcome bias. It could be whatever you want to call it. It's a bias that creeps into our little monkey brains and says, well, of course I should have seen that coming. And a really good example of this is back when Apple was first founded, there was actually three founders. So there's Steve Wozniak, who was like this, you know, like the technical brilliant guy.
Then there was Steve Jobs, of course, who was the design guru and marketing genius. amazing person, pretty much would have taken over the world if he wasn't to pass so soon. And then there was a guy called Ronald Wayne. And normally the story that gets told about Ronald is that he sold his shares, I think it was about a 10% stake in Apple.
So the Apple that we know today, I think he sold that for $800 back to the other two. So I'm just going to look at this in Google, Kate. Sorry, I should have prepared this. But if we look at the the company's valuation today, $2.2 trillion, not to mention all the dividends, his personal investment would be worth $220 billion.
Now, when he was asked about this, he put a thing out on Facebook and he says, I made the best decision that I could have at the time based on the information that I had available. But of course, if he knew that it was going to become a $2.2 trillion company, he would have just kept his investment. But he didn't know that.
So now we can look at him and we can say, geez, you're an idiot, aren't you? When in reality, he probably made a pretty good decision. but it just happened that this was the one billion chance that it goes on to be a $2.2 trillion company.
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Chapter 7: How do you evaluate the outcomes of your financial decisions?
So that's a really interesting one too.
He can look back and go, I looked at why I made that decision and it was the right decision at the time and I maybe couldn't have anticipated this result happening, but I actually went through a decision-making process and that's how I decided to sell my shares.
Yeah, yeah. And so this brings in this whole other element, Kate, and I know you want to talk about this. It's like the common pitfalls that kind of creep into our decision-making, particularly for financial decisions. So what are some of those mistakes that we make?
Yeah, I mean, even if you outsource your finances to an advisor, I think it's really important to take control of those decisions and actually really understand them. Because even if you do that, you're still making some decision into choosing who you actually trust to manage your money. And you're still having to make the decision to execute things.
So I really don't think anyone can escape making decisions. And... I think this quote really works well from Greg McCohen in his book Essentialism, where he said, when we surrender our ability to choose something or someone else will stop in to choose for us. And I think sometimes we can get so overwhelmed with our finances that we make the decision to not actually make a decision.
And we don't realise that by doing that, a decision's already been made for us, because By not taking action, you're missing the opportunity to do X, Y and Z with your money instead. So I think that's always an important one. Not making a decision is still a decision.
And I think even if you do choose to not make a decision, you should write down the reasons why at that time you're not making a decision and put a date in your calendar to revise, review those notes and actually make a decision. think through it again and decide, am I going to make a decision now three months later?
So I guess some of the common mistakes we make when making financial decisions, which are really helpful to learn from because making too many wrong decisions with our finances can cost us really a lot over our lifetime.
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Chapter 8: What practical tips can help in making better financial choices?
And some of them are that we're too trusting, getting advice from the internet. I know there's been a lot of press recently about Aussies getting their advice from TikTok. I mean, there's some...
Fin talk.
Yeah, talk. I mean, there's great people out there producing content, but I think you need to go one step further. You really need to get a broad range of views, read widely. I mean, that's probably going to be more challenging now that news is becoming a bit more limited online after today's announcement.
Yes, not to timestamp this conversation too much. Do not get me started, Kate.
No, no. Yeah, so I think it's really, we've talked in the past about making sure you really get your financial information from a wide variety of sources, not just listen to one or two podcasts, actually go on to the Money Smart Government website and don't just get all your information from one bank.
So I think that's one of the first things that we run into as a mistake when we're making our financial decisions is Another one is that we don't always read the fine prints and that catches a lot of people out. And I think that can really factor into our financial decision making because we don't have the whole picture when we make a decision.
And if we're only making a decision off limited information, that can really impact the outcome as well.
Absolutely, Ken. There are so many things here. We've got some dot points here. We focus on returns over fees. And then I'd say there's a counterpoint to that. We focus on fees over returns. And so what's important? And then we get too greedy, but then we get too fearful. So these are, you know, I think these are all things that some of them are behavioral biases.
Some of them, you know, not necessarily behavioral biases, but kind of like just common sense. And so you've got one here, you know, we don't common sense check these things. And to your point earlier on about writing down your decision in our membership services at RAS, like when we release a share idea or ETFs, we write it down.
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