“Life is a sum of all your choices” Albert Camus (French Philosopher)
Decision making permeates our lives. At a personal level we make decisions on a daily basis in our social interactions. As well, the decisions of others, translated into their actions, can have irreversible consequences on our lives just as the decisions of those in power shape the very world we live in.
As consultants, decision making is a fundamental part of our business. We make decisions for others, or at least provide the necessary information available to assist in the decision making process. At the same time we are also responsible for making decisions on investment managers, based on our analysis of their decision making.
Since we know that chance can play a big role in the outcome of any individual decision, analysing whether a decision was good or bad based on success or failure does not tell the full picture. This is particularly relevant in the active fund management space where persistent performance is the Holy Grail.
Decisions made on impulse are more likely to lead to regret while paralysis on making decisions induced by fear can be just as fatal. In our personal lives we are more likely to be driven by impulse, and in a way life would be boring if we did not embrace our impulsive side at times.
However, in our role as decision maker for others there has to be a colder analytical approach to our decision making. Therefore, examining the reasoning behind a decision and the wider decision-making process is arguably more important than analysing the outcome, if we are to test the robustness of the decision making in an uncertain and dynamic market environment. (Of course intuition can play a part but this is not to be confused with impulse).
In the end the best decision may not always be the optimal one, that is if ‘optimal’ can even be verified, we can only make use of all of the available information and apply reasonable assumptions to make the most effective decision at that time.