How to make smart decisions without getting lucky

Brett Surman is a Financial Adviser with Gilkison Group.

Few things will change your trajectory in life or business as much as learning to make effective decisions. Yet, no one really teaches us what it means to make consistently high-quality decisions. Making better decisions isn’t one skill but rather a series of tools and frameworks. What distinguishes consistently good decision-makers from poor ones is a series of diverse mental frameworks and tools.

Think about the state of your life, your career, your business, your major relationships — anything consequential to you. How many important decisions have you already had to make? With the benefit of hindsight, how well did you make them? How many decisions did you make today?

How did you make these decisions? Is there a better way?

Mental models are how we understand the world. Not only do they shape what we think and how we understand but they shape the connections and opportunities that we see. Mental models are how we simplify complexity, why we consider some things more relevant than others, and how we reason.

Most of us operate like a carpenter with only a hammer. To a person with a hammer, every problem looks like a nail. No matter the job, we pull out our hammer and attempt to make it work. However, when it comes to improving our ability to make good decisions, variety matters. The more mental models we have in our toolbox, the more likely we will have the right model for the situation at hand.

To help you start building your toolbox of mental models, we have provided a summary of the most useful mental models below to learn more about.

First principles thinking – Breaking down complex problems into fundamental truths and reasoning from there to arrive at new conclusions. Example: When considering an investment opportunity, an individual might use first principles thinking to break down the investment into its fundamental components, such as the underlying assets, the risks involved, and the potential returns. By reasoning from these basic principles, the individual can make a more informed decision about whether the investment is a good fit for their financial goals and risk tolerance.

Circle of competence – Focusing on areas where you have expertise and knowledge, and avoiding making decisions in areas where you lack expertise. Example: An investor might use the circle of competence to focus on investing in a specific industry where they have knowledge and experience, rather than trying to invest in multiple industries where they lack expertise.

Occam’s razor – The idea that the simplest explanation is often the best one. Example: When faced with a complex financial decision, such as choosing between multiple investment options, an individual might use Occam’s Razor to choose the simplest and most straightforward option, such as the simpler option with lower fees.

Inversion – Thinking about a problem in reverse to help identify potential solutions. Example: when considering a risky investment, an individual might use inversion to ask themselves what would need to go right for the investment to pay off, as well as what could go wrong and result in financial losses.

80/20 principle – The notion that roughly 80% of results come from 20% of the overall effort. Example: Applying the 80/20 rule to personal finance can involve identifying the 20% of expenses that account for 80% of spending, and then finding ways to reduce or eliminate those expenses to save money.

Probabilistic thinking – Evaluating potential outcomes based on their likelihood of occurring. Example: An investor might use probabilistic thinking when deciding whether to invest in a company by evaluating the probability of success based on factors such as market conditions, competition, and the company’s financial performance.

In conclusion, mastering the art of effective decision-making is a game-changer in life and business. By embracing a variety of mental models, we expand our perspectives and enhance our ability to make consistently high-quality decisions. Start building your toolbox of mental models today and unlock the power of informed decision-making. Remember, the quality of our decisions shapes the trajectory of our lives. Choose wisely and embrace the potential for growth and success that lies within each decision you make.