Making Better Financial Decisions

11 December, 2019 / Articles

After graduating from campus, Bahati set up a software company that created software for financial institutions. The business performed well and Bahati thought of acquiring another software company, this time, one that created point-of-sales software for retailers. The way he saw it, he would save on running costs and make millions through business operating synergy gains. Well, you must be thinking that Bahati is a genius. However, the combination meant that Bahati’s company would absorb liabilities owed by the new company, have to grapple with slow customer subscription and declining market share that would weigh down on the firm’s overall profitability in the near future.

Do you still believe in Bahati’s genius?

As Nobel winning psychologist David Kahneman pointed out, we are quick to jump to conclusions since we give too much weight to the information that is right in front of us, while failing to consider offstage information.

In their book, Decisive – How to make better choices in life and work, Chip and Dan Heath talk about the “spotlight effect.” In decision-making, humans tend to focus on one item like a spotlight in a dark theatre room, while ignoring everything else. The problem with this is, we find ourselves in terrible situations like Bahati’s.

It is important to think through the uncertainties of each decision and consider multiple points of view especially where our finances are concerned. Moreso, avoid the following:

  1. Narrow framing

Narrow framing is typical of teenagers who generally assert a single option without exploring any others. Unfortunately, most organizations and individuals also tend to make decisions like teenagers. To avoid narrow framing, we should see our options as limitless and consider the opportunity cost involved.

  1. Confirmation bias

When we have a quick belief about a situation, and then seek out information that affirms our belief, it limits our decision-making. A better approach would be to consider more options concurrently in order to learn the shape of the problem. So, the next time you want to launch a new product or venture in to a new market it is good to consider several points of view from various stakeholders.

  1. Being overconfident

Remember the common phrase “if you know you know”? The one you say when you are super sure that everything will turn out perfectly? When people think they know more about how the future will unfold, they are shining a spotlight on the information that is nearby and they draw inferences from that. You should have an allowance for failure; one that prepares for both adversity and success. Try having a pre-mortem where you try to identify how something could fail. A key lesson is the need to set a tripwire that can be used to provide precious realization that there are choices to be made and kick us out of our autopilot.

  1. Deciding in a bubble

When deciding whether to buy that plot in Kajiado or let go of a non-performing employee, most people write down the pros and cons. However, does that help? Most times, it leaves you conflicted and what we need is a quick dose of detachment and putting things in to perspective. It is good to take a step back, zoom in, and zoom out and assess the situation from the outside. Better yet, consult a person who has done it before. In doing so, we honour our core priorities hence making it easier to resolve present and future dilemmas.

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