(1:30) - Decision Traps: 10 Barriers to Overcome (11:20) - Meta-Questions for Decision Makers (19:45) - Could You Live on a Decision Budget? (26:20) - Got Any Sunk Costs? Tesla vs. Big Auto (32:30) - Could You Be Indistractable? Mind Over Money
Welcome back to Mind Over Money. I'm Kevin Cook, your field guide and story teller for the fascinating arena of behavioral economics.
This is part 3 of my exploration into the strategies and tactics of successful companies, their leaders and other extraordinary folks who just get a lot more stuff done, and who can help you learn the same. In the last episode of this series, I introduced a book call Decision Traps: The Ten Barriers to Brilliant Decision-Making and How to Overcome Them, by J. Edward Russo and Paul J.H. Schoemaker. I promised I would spend a little more time going over their approaches in this virtually unknown but power-packed book from 1989. Incidentally, I did find that lots of used copies are available through Amazon, in both hardcover and paperback, starting at $2. Coming up, I'll describe the dynamic decision duo's 2001 book I just discovered there. In the podcast, I read the descriptions for each of the "top ten blunders" of decision-making from the introduction to Decision Traps. One paragraph I forgot that I wanted to read on the next page was this gem that I love... "This book, therefore, will not only list traps to avoid but also teach you the process of decision-making as a coach teaches the process of swimming. With practice you'll not only learn the rules for making great decisions, but also make the process part of you. When you've got a good process and you have internalized it, you can rise above stress and confusion." This is the epitome of what I have taught traders for two decades. Short-term trading is the ultimate mental "stress game" and one of the biggest reasons that 95% of new traders fail repeatedly (lose most of their capital more than once) is that they never formulate a specific process that suits the market being traded and, more importantly, their psychology, time frames, and goals. The Key Elements of an Excellent Decision-Making Process In Chapter 1 of "Traps," Russo and Schoemaker dive right in with the four main elements that they believe every good decision-maker must, consciously or unconsciously, go through... 1) Framing 2) Gathering Intelligence 3) Coming to Conclusions 4) Learning (or Failing to Learn) from Feedback That last element really stands out after you understand their "traps" 8, 9, and 10 which I list here... 8. Fooling Yourself About Feedback 9. Not Keeping Track 10. Failure to Audit Your Decision Process I see these that each of these traps could be flipped into positive, successive action steps... Be open to diverse and detailed feedback. Track all decisions in terms of process, impacts, constraints and outcomes. Once you have these records from feedback and tracking for all major decisions, you can go back and audit your process over any time frame. In 2001, Russo and Schoemaker published their follow-up book Winning Decisions: Getting It Right the First Time. Here's the description from Amazon... Business revolves around making decisions, often risky decisions, usually with incomplete information and too often in less time than we need. Executives at every level, in every industry, are confronted with information overload, less leeway for mistakes, and a business environment that changes rapidly. In light of this increased pressure and volatility, the old-fashioned ways of making decisions–depending on intuition, common sense, and specialized expertise–are simply no longer sufficient. Distilling over thirty years of groundbreaking research, Winning Decisions, written by two seasoned business advisers and world leaders in behavioral decision studies, is a comprehensive, one-of-a-kind guide to the proven methods of making critical business decisions confidently, quickly–and correctly. While this newer book sounds good, I would still encourage anyone seeking great fundamental insights and tools for building (or rehabbing) their own decision-making process to order a copy of Decision Traps. Could You Live on a Decision Budget? Next in the podcast, I share a strategic habit from Dave Asprey's new book Game Changers: What Leaders, Innovators, and Mavericks Do to Win at Life. You may know Dave as the original "biohacker" and CEO of Bulletproof Nutrition. Yes, he's the butter-in-your-coffee guy too. What's so cool about this book -- and the convincing attribute that made me buy it -- is that Dave interviewed hundreds of excellent leaders and superstars from all fields and asked them all the same exact question at the end their time, usually an hour or so on his Bulletproof Radio podcast: "If someone came to you tomorrow, wanting to perform better as a human being, what are the 3 most important pieces of advice you'd offer based on your own life experience?" Then he took the time to statistically analyze their replies and organize what they said they learned as data. This was not hard for the guy who now seems only to care about nutrition, supplements, and longevity (I think he says his goal is to live to 180 years old). Because in a former life, Asprey was a Silicon Valley tech maverick who ran the Internet and Web Engineering program at University of California, Santa Cruz, where he created one of the first working instances of cloud computing (source: Wikipedia). One of the cool nuggets he divined in Chapter 1, "Focusing On Your Weaknesses Makes You Weaker," was from his own personal coach Tony Stubblebine, the founder and CEO of Coach.me, a company based on the idea that positive reinforcement and community support work in tandem to help people achieve their goals. Tony operates his daily life with something he calls a "decision budget." Every day, he allows a limited number of decisions and this forces him to ruthlessly ignore the trivial and defeat the distracting so that he can focus on the wildly important (remember that idea from Part 2?) and execute on his top priorities. In the podcast, I muse on what decisions would probably get eliminated, like email, unplanned phone calls/meetings, social media, news media, and unscheduled entertainment. Smarter, Faster, Happier Here's the description of Game Changers on Bulletproof.com... In his third book, Dave Asprey shares anecdotes from game changers like Dr. Daniel Amen, Gabby Bernstein, Dr. David Perlmutter, Arianna Huffington, Esther Perel, and Tim Ferris as well as examples from his own life. Game Changers offers readers practical advice they can put into action to reap immediate rewards. From taming fear and anxiety to making better decisions, establishing high-performance habits, and practicing gratitude and mindfulness, Dave brings together the wisdom of today’s game-changers to help everyone kick more ass at life. What they don't tell you anywhere is that Dave organized his giant, one-man statistical study of extraordinary success and fulfillment into 40-some laws, that were derived from the three primary patterns he saw in the data: things that make you smarter, things that make you faster, and things that make you happier. Another Dave who's been working on similar ideas for a few decades is the author of Getting Things Done and Ready For Anything, David Allen. In the podcast I describe how I apply a certain "law" of Allen's to my training and coaching of traders. I also mention his excellent TEDx Talk in Amsterdam and promised to have the link here. Got Any Sunk Costs? Tesla vs. Big Auto Every weekday, I am one of tens of thousands of aspiring achievers who receives a text notification at 7am from success coach Darren Hardy with a link to that morning's 5-minute video lecture. Each "DarrenDaily" hit is usually a unique take, tactic, or task to help you achieve more with your mind and life. In this episode, I describe a real-life example from Darren's business that illustrates the "sunk cost" effect better in just a few minutes than anyone I'd ever heard in behavioral economics. He tells why and how easily he walked away from a $150,000 investment that had turned substantially sour and was going to require another $50,000 to "save." Then I explore the "sunk cost" thinking of legacy car companies like General Motors ( GM Quick Quote GM - Free Report) , Ford F, and Toyota TM as they are confronted by the success of Elon Musk with electric vehicles (EVs) and Tesla TSLA. Hedge fund manager Ron Baron explains why he's holding his 1.6 million shares of TSLA by framing the problem for the big guys: their manufacturing systems and entire organizational structure are so committed to the internal combustion engine that they face massive inertia to change fast enough and compete with Tesla in EVs and alternative power. This is also a source of not just inertia but fear for car dealers as their primary source of revenue is not sales but service of those complicated engines. Here's an 2-minute excerpt from Ron Baron's February appearance on CNBC where he explains why Tesla could do $1 trillion in revenues by 2030. Baron is a disciplined long-term investor to begin with, but when you listen to his thesis (this full interview on Feb 4 "Squawk Box" is over 36 minutes) you can understand why even though his $350 million investment in 2014 at $219 had quadrupled, he was not interested in selling yet. As a rapid innovation aside, an unexpected way that these car makers are being forced to adapt and innovate comes courtesy of the current global health crisis. Here was the recent view of the automotive industry being tasked to produce much-needed ventilators, from Lux Research Analyst Michael Sullivan... "Two factors enabling automakers to shift gears to medical device production are (1) the adaptability of car parts to ventilators, and (2) the flexibility of digitally enabled supply chains. Ford, GM, and Tesla are among the most advanced in digital supply chain management, which enables them to quickly locate and send specifications to suppliers, who are able to adapt production processes to create the parts. For the designated small manufacturers, the shift fills the gap caused by idle auto part production but also requires adapting processes to the smaller form factor and higher volume of ventilator parts. Manufacturers should use this example as a comparison case study to assess their own adaptability to new product demands." Decision Frames: A Vital Tool for Trading and Investing A shorter-term example of "decision frames" when it comes to investing in disruptive companies is how we handled a stock like NVIDIA NVDA during the "flash bear market" of March. I know enough about the leader of machine learning (ML) and artificial intelligence (AI) technologies, and where I want to buy and sell the stock, that I already had a game plan going into the market's waterfall cascade. We were buyers on the way down at $230 and $215 and I recommended more near $200. We've since enjoyed shares recovering as high as $278 this past week. The reason a plan like this worked has as much to do with a quality company experiencing high volatility in its stock price (creating opportunity) as it does with having a plan before the "stuff hits the fan." Knowing the possible scenarios for volatility and panic and then deciding in advance what you will do is a type of decision framing that prevents emotional overreaction and getting caught up in the stampede of the herd. Could You Be Indistractable? You could also say that sticking to a plan like that -- especially when the market news is filled with voices of grave concern, and panic selling is flashing on every ticker -- requires a skill of not being distracted. On the morning I recorded this podcast, I discovered and bought the latest book by Nir Eyal, author of the Silicon Valley design bible Hooked: How to Build Habit-Forming Products (Random House, 2014). Nir refers to his work as "behavioral design" because even though his research taught web, mobile and social media companies like Facebook ( FB Quick Quote FB - Free Report) , Apple AAPL, Twitter ( TWTR Quick Quote TWTR - Free Report) and Snapchat ( SNAP Quick Quote SNAP - Free Report) how to capture (enslave?) our attention, he has always believed that tech companies could and should use the insights and tools to help people create positive habits too. About Nir, from Wikipedia... After graduating from the Master of Business Administration program at Stanford in 2008, Eyal and fellow students founded a company that placed online ads in Facebook, with Eyal serving as CEO. His work in the company sparked his interest in the psychology of users, and he went on to become a consultant in product design. In 2012, he taught a course in the program on product design at the Stanford University School of Engineering. Nir's latest book is Indistractable: How to Control Your Attention and Choose Your Life. When you order it, you get a slew of great accompanying resources as his goal now is to help us "Regain Hours of Lost Productivity" and "Control your time and your attention by understanding the psychology of distraction." For my own dive into the dangers of tech distraction, see my January 2018 episode Apple iPhones Give Me the Feelies. I've got some exciting guests coming up on Mind Over Money so make sure you are subscribed wherever you listen on iTunes, Spotify, or SoundCloud. I might even talk Nir Eyal into coming on the program and that should be a good one because he's more crazy about behavioral dynamics than I am (if that's possible)! Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader and Healthcare Innovators portfolios. Click "Follow Author" above to receive his latest stock research and macro analysis.