James Langabeer PhD, Vice Chair at UTHealth, and founder of Yellowstone Research, LLP, advises on financial and strategic decision-making.
Businesses and consumers alike routinely make selections between alternatives, or choices. These choices could propel an organization to buy a new building or start a new service line. As consumers, we choose how much to spend and where to live. Decisions are all around us daily. The pattern of choices over time, both big (strategic) and small (operational), can make or break companies. This is complicated since, as humans, we are often ruled by less-than-rational thought. Our actions can be tightly coupled with hidden emotions, thoughts and feelings so concepts of behavioral economics are especially insightful.
Theories involving the experience curve suggest that the more we do something, the better we get. We learn how to do certain things better, and we get faster and more efficient. But despite what people might think, this doesn’t happen with most decision-making. We don’t see evidence of large-scale learning and improvement in choices simply based on experience. It’s much more than that.
Although we make hundreds of choices routinely, we make most of them at the subconscious level using a combination of heuristics, habits and hunches. I call these the 3 Hs. Heuristics are mental shortcuts that reduce the burden on our mind, while a habit is a behavior that is so ingrained that it requires almost no conscious thought. Hunches, or intuition, are our gut-level instincts. All three can be helpful to speed up the decision process, but they can also be detrimental to a decision’s quality and outcomes. They tend to result in biases, such as overconfidence or possibly risk aversion. When we rely on these exclusively, our judgment is limited and we may make less-than-stellar choices.
I routinely study the decision process of managers and individuals and find similar patterns. We tend to shortcut using the 3H’s in one of three areas: Either we don’t fully recognize the magnitude of the consequences for the decision at the time we make it, we aren’t fully aware of all available alternatives or we didn’t spend adequate time contemplating the choice.
When choices involve money, and most do, we have to become more mindful. I call this behavioral congruence — aligning our analytical reasoning with our intuitive and emotional processing. We become mindful (conscious, aware and present) when we momentarily stop, reflect and possibly redirect our energy. Think about when you’re in the grocery line, as a simple example, and how you might unconsciously throw some final items into your cart. Or, you may start looking at cars and wind up buying the first vehicle you test drive. We often make choices based on what is immediately available to us, and that is the opposite of being fully conscious.
Strategies For Making Better Choices
We need to cultivate mindfulness and congruence. It’s easier said than done. But here are a few simple strategies that can help us all make better choices.
First, before actually choosing anything, stop and focus on the rationale for the decision. Ask yourself why you are making a choice. Why now? What do you hope to achieve? What are the intended goals? Are you thinking more about results today? Or some point in the future? Avoid the present bias and think about the long-term effect. What would this decision produce in future years? Contemplate all that for a few minutes to have your mind crystallize on an intention or purpose.
Second, pull together as many alternatives in the decision that you can find. Options help provide relativity between features, quality and cost. Options also help give us negotiating leverage on price. Don’t ever feel boxed in by just one possibility — there are always a handful of options you could take. Seek to maximize your options. Time spent in this area will pay off significant returns down the road.
Third, take a deep breath at the point of making a choice. Deep breathing can stimulate oxygen flow to your brain, which can help bring clarity to choice. Even C-level executives often can be seen holding their breath during intense negotiations, just as consumers do when they purchase a used car. Note if you are holding your breath or if you seem to be inflexible or responding without thought. If you are mindful, you can observe how you tend to present at times of decisions and negotiations.
Fourth, consider the consequences. Ask yourself a series of what-if questions. What if I do this now? What are the opportunity costs (or alternative uses of this money)? What is most likely to happen? What is the best or worst that could happen? Am I prepared for that outcome if things go awry? Try to reconcile all of that and prioritize your options.
Then finally, make a choice, and commit to it. Follow-through is essential, as is avoiding procrastination biases that often hamper us. The use of a daily journal to record and reflect on significant decisions that day is especially handy — as are reminders, decision prompts and notes. Decision outcomes are not just the result of the process of choosing, but also the process of implementing. You have to do both well.
Through mindful reflection and contemplation, we can all get better at making choices involving money.