A deep dive into decision-making: Dr. Nicholas Beecroft

CFL: In your work with professional investors, how consistent is the decision-making behaviour you’ve seen?

NB: As you might expect, I’ve seen a full spectrum of decision-making behaviour: from intellectual to instinctive, rational to emotional, adaptive to maladaptive.

Some people are extremely thorough in their analysis of the options, scenarios, risks and potential outcomes; others literally make a gut decision within a few seconds. Some have systems and due diligence processes; others tailor the decision-making process to the specific case.

CFL: Are there any decision-making errors that you see consistently?

NB: Yes. Some key mistakes I often see decision-makers commit include:

• Trying to make a decision before they have the necessary facts or a thought-out view of the outcomes
• Procrastination, because they let anxiety and fear get in the way
• Failure to see the big picture, or the wood for the trees
• A lack of awareness around their own biases (cognitive, emotional, social, informational) and underlying assumptions
• Using intellect, but ignoring intuition or the information contained in the intense emotions or bodily sensations that can arise when a decision point comes
• Wasting time on obsessive research
• Letting ego, reputation, shame, embarrassment or conflicts distort the decision

Each decision is different, but the solution to making decisions well lies in running through the intellectual analysis and then integrating that with the heart, gut, body and consciousness. Once you’ve done this, the best answer usually pops out, clearly made, with a to-do list and a lot of freed-up energy.

CFL: The science shows that people feel better about a decision they make when there are fewer options. Why is this and what’s the solution for a decision-maker like a portfolio manager or trader who always has a lot of options?

NB: Too much choice can be overwhelming. As a Brit, I remember the first time I went to New York. My girlfriend sent me out to get a carton of milk. In England there were three choices: full fat, skimmed or semi-skimmed. But in New York, I had a whole aisle full of choices, none of which I understood. I returned 20 minutes later, exhausted and embarrassed with no milk.

It’s very stressful to have too many choices, especially when the differences between them all are small or unclear. Then, once we’ve made a choice, we tend to worry about the missed opportunities and can waste a huge amount of time and energy ruminating over that.

Have you ever spent half and hour scrolling through Netflix to choose a film from the thousands of options? Sometimes it’s so soul destroying that you give up and don’t bother.

Yet, you can make a decision easier by narrowing it down. Shall we watch a thriller or a comedy? Comedy. OK. One we’ve seen before or a new one? Slapstick or dark? OK. Here’s two options. Choose one now. That’s a lot easier.

The paradox is that we’re evolved for both simplicity and complexity. Mastering that requires integrating intellect with intuition. That way, we leverage a kind of holistic intelligence that is very powerful and innate to each of us.

I find the best investors achieve this by having clear systems – algorithms, rules and routines, doing a thorough intellectual analysis – which they then run past their ‘other half’ – their heart, gut instinct, peers, advisors, inner critic, wise inner investor and future vision.

This involves, on the one hand, being very clear about your criteria, measurements, stakeholder positions, and desired outcomes. On the other, you need to fine tune your intuition, your heart intelligence, your gut instinct, and be aware of your cognitive shortcuts.

CFL: Fund managers tend to value optionality and put off making decisions until they have to. Is that behavior helpful or detrimental?

NB: It’s a balance. Sometimes striking while the iron is hot and making a decision as the moment arises is the right thing to do. After all, the opportunity can pass or be snapped up by others. For some, acting quickly is the best way to avoid getting tied-up with analysis-paralysis.

However, we can also make impulsive decisions which are flawed with biases and then live to regret them.

Good reasons to delay a decision include needing more information or taking a moment to thinking through the outcomes and measure the risks.

Sometimes it really is better to sleep on it or to go for a walk in the woods. Our brain, heart and gut all synthesize very complex, multidimensional information and that happens best when we get our rational mind out of the way and let it tick over in the background. If you can’t make your mind up, it can help to take a break, move your body, be with other people, listen to music, mediate or stroke the dog.

Another tactic when considering a big decision is to add a controlled amount of emotional intensity. It’s one thing to consider different options as an academic exercise but quite another when you have to hand over your money. You can simulate this by taking steps in the direction of a decision – for example, make a small investment or sell a few shares and see how it feels. That emotional or physical reaction is something that’s actually very useful to you; you can learn to understand and use it.

CFL: Give me an example of how you’ve helped a fund manager make a big decision.

NB: I recently helped one fund manager come to a clear decision on whether to hold or sell one of his major positions. He runs a value fund which had 35 positions at the time and a very long term investment time horizon.

He had spent three months meticulously analyzing the company in question before deciding to take a position. Not long after, however, he began to be troubled with doubts, particularly around competitive positioning.

As a result of these doubts, the PM found himself continuing to devote time, energy, and money to reconsidering his position. After three weeks of this, he knew he needed to move on and make a clear decision one way or the other, so he could give his attention to the rest of the portfolio and to new ideas.

That’s when he came to me, as an objective expert in decision-making. We sat down and worked through the Decision Deep Dive, a process which got him to a decision he was confident about. In all, it took six hours, and far less energy than he had already burnt on wrestling with his doubts.

CFL: Walk us through your process. How does it work?

NB: First, the PM took me through the investment thesis. Looking at the intellectual side of his decision, I tested his business analysis using what I call my ‘standard London Business School/McKinsey approach’. He’d done his diligence thoroughly, getting to really know the company, its factories, suppliers, customers and stakeholders, and could explain it well. The company was basically sound but he wasn’t confident that it could sustain its competitive position in the medium term which, as a value investor, was crucial to him.

Then we examined each of his doubts, in detail. We identified his key values and interests pertaining to the decision. We lined up the, criteria, the arguments, and the pros and cons of each outcome.

Next, we moved to the non-intellectual elements of his decision-making process. I facilitated what’s technically called a Voice Dialogue Process, by which he immersed himself in and spoke from each of the competing voices in his head. It might sound strange, but it is an amazing technique which integrates the logical, rational parts of the brain with the emotions, intuition, instinct and body.

Without going into too much detail here, using the Voice Dialogue Process, we listened to 5 of his different internal voices, each in turn. The “sell” voice and the “hold” voice each had their say, but we also gave some attention to some others that he was less aware of, like the “wise elder investor” and the “fearful inner child”. Finally, we listened to the “my investors” voice, and tried out the messaging around the decision he was favoring, to experience it from an investor’s point of view.

Finally, I took him through a process of querying his heart intelligence, his gut instinct, muscle tone, and finally, the energetics behind the dilemma.

Putting all of these factors together, he arrived at a clear decision.

CFL: So, step-by-step, you enabled this PM to step back and reflect on multiple, deep levels. What was his decision in the end?

NB: Through the Decision Deep Dive, he integrated the rational and analytical, the multiple inner voices, his heart, gut, body and energetics.

It helped him come to a very clear decision: the company had good prospects for a couple of years but its competitive position, strategy and leadership were not sufficiently sound to hold it longer term. He would get out as soon as he had a better idea to switch into.

After three months of research and three further weeks of indecision, it had taken six hours of facilitated decision-making to get to this clear, confident answer. He’d also arrived at a strong and lucid rationale to communicate to his investors.

CFL: Can the PM now make better decisions on his own?

NB: He found the process a really useful learning experience and tells me he has been practicing the techniques ever since. He has no doubt that it has improved his judgement and decision-making capabilities, though mastery obviously takes repetition and practice.

CFL: Instinctively, we’d all look to the P&L outcome, but that may or may not actually reflect the quality of the decision. What did you see as the measure of success for your work with this PM?

NB: That’s a great point. Ultimately, time will tell and the result will be reflected in the performance of the stock price over the next 5-20 years. What I can say for sure is that, having run through this process, he took a decision which had been eluding him and instantly found peace of mind, confidence and, above all, the time and energy to get on with looking for better investment opportunities. Six months later, he says his decision still feels solid and that he has not had a flicker of doubt about it.