Three Dimensions of Decision Making

Decision-making shapes the trajectory of our lives

Life is not merely about surrendering and accepting circumstances. At every moment, there are decisions we must make to ensure life continues to progress. Even upon waking, we are faced with at least two choices: to get out of bed and begin our day or to return to sleep.

In this article, I aim to explain a perspective on decision-making. This perspective is one I commonly use in making decisions, whether for business or investment purposes.

You may wonder why I would write an article or guide on something as seemingly simple as decision-making. The question itself may seem straightforward, but it requires a rather detailed explanation to answer comprehensively.

For me, decision-making shapes the trajectory of our lives. In other words, our current lives are the cumulative result of the decisions we have made in the past. By developing strong decision-making skills, we can achieve our goals and dreams, determine the relationships in our lives, and live the life we desire.

This concept is akin to compound interest in growing wealth. A series of correct and well-informed investment decisions will exponentially increase our wealth. This outcome can only be achieved if we make rational decisions, one at a time.

In my view, rationality is never perfect. However, rational decisions provide greater benefits and a solid foundation.

To make rational decisions, we must consider three fundamental dimensions. I will elaborate on these dimensions below:

Dimension 1: Skill and Luck

"Luck is what you’re dealt; fate is how you play your cards."

Is there a luck factor in the success of our decisions? The answer is "yes." Some individuals are metaphorically dealt a pair of aces, while others receive random cards.

Yet, many attribute success or failure solely to skill. In reality, luck plays a significant role.

For example, consider two investors, A and B, who both buy the same stock at the same price. However, only Investor A conducts a thorough analysis of the business.

Eventually, the stock price rises. Investor B may believe their investment skills are excellent, when in fact, it was luck. Meanwhile, Investor A attributes their success to luck as the stock was quickly recognized by the market.

"The key to success is playing the hand you were dealt as if it were the hand you wanted."

Rational decisions should be made with an awareness of our limitations. Recognizing the weaknesses in our "hand" allows us to make wiser decisions, unlike those who act without consideration.

There are times when luck does not favor us despite our best efforts. For example, in 1993, Berkshire Hathaway purchased Dexter Shoes, a well-established brand at the time. However, with increased competition from imports, Dexter Shoes quickly lost its competitive edge.

"What I had assessed as durable competitive advantage vanished within a few years. By using Berkshire stock, I compounded this error hugely. That move made the cost to Berkshire shareholders, not $400 million, but rather $3.5 billion. In essence, I gave away 1.6 percent of a wonderful business — one now valued at $220 billion — to buy a worthless business."— Warren Buffett

This case illustrates that success is not solely due to skill; luck plays a crucial role in business, personal endeavors, and life.

Dimension 2: Knowns and Unknowns

Recognizing and admitting what you know and what you cannot know are essential elements in making rational decisions. The best investors never assume they know everything.

This might sound counterintuitive, but good decision-makers accept that the world is inherently uncertain and unpredictable. Therefore, we must think probabilistically, focusing on understanding the degree of uncertainty in our decisions.

"All I want to know is where I’m going to die, so I’ll never go there."— Charlie Munger

For instance, predicting the exchange rate between the Indonesian rupiah and the US dollar involves numerous factors, such as the state of the Indonesian economy, national foreign exchange flows, geopolitical conditions, and interest rates. Many of these factors are inherently unpredictable.

Unfortunately, many people fail to distinguish between what they know and what they do not. They may act based only on superficial knowledge, which is the most dangerous aspect of decision-making.

The best course of action is to focus on one’s areas of expertise and maintain the discipline to avoid what is unknown.

Dimension 3: Importance and Unimportance

In decision-making, it is crucial to distinguish between what is important and what is not. One should not prioritize trivial matters while neglecting critical ones.

For example, when investing in a business, many people focus on irrelevant factors such as daily price fluctuations, which securities firms are buying or selling, index inclusion, or speculative news.

Why do people get distracted by unimportant details? This tendency is rooted in inherent human traits, which I will elaborate on in a future article.

"When you only focus on unimportant things, you lose sight of the important things."

To identify what is important in decision-making, ask yourself about the purpose of your decision. For example, my investment goals are capital security and adequate returns. If any information I encounter does not address these two aspects, I disregard it.

Thus, the focus in investment decisions should be on critical aspects of the business, such as ownership, product or service generation, past performance over five years, and competitiveness in the market. These questions will ensure capital security and provide insights into potential returns.

Always reflect on your decisions. Avoid making choices based on others' actions, emotions, a desire for recognition, or pride. By understanding what is essential to achieving your goals, you can minimize the risk of errors in decision-making.

"The groundwork is now laid out. Time to dig deeper."