A Framework for Making Better Decisions

From what to have for dinner to how to invest for your goals, you’re making decisions every day. Human nature can get in the way of making decisions that get the results you’d like.

Behavioral expert and Harvard professor Cass Sunstein  explains how decision hygiene can lead you to better decision health, just as washing your hands regularly helps lead to better physical health.

Two Key Components to Making Decisions

Decision-making involves both bias and noise:

• Biases are our common beliefs and preconceptions.

• Noise, in this context, means that people show variability in their judgments, based on their circumstances or even their moods in the moment. When people feel happy, they make certain choices. But if their mood changes, they may change the decision they make as well.

What Makes Up Decision Hygiene

Decision hygiene is a set of practices that can screen out both noise and bias as we make choices, Sunstein notes.

It’s comprised of three elements.

1. Set Guidelines

“If you have defined guidelines in place, you are less likely to listen to the noise of everyday life and less likely to cling to preconceptions. Using the same framework each time provides disciplined strategy that can be repeated for future decisions,” according to Sunstein.

2. Apply the Wisdom of Crowds

Sunstein’s research has found the “wisdom of the crowd” is often less biased than that of one or two people. The collective knowledge of a group can weed out the noise and individual biases. That’s why he suggests talking to several people and getting their independent judgments. “You can use the average or the majority to find a common pattern,” he says.

3. Consider Every Component

There are many variables involved in a particular outcome. “You’ll want to think of all the components of a situation and what would have to happen in each piece for a prediction to be true,” Sunstein says. “You can use decision hygiene to structure your conclusion and overcome kneejerk reactions.”

Look for the Super-Forecasters

Some people are better than others at making predictions, according to Sunstein’s research. What makes them different from the rest of us? They use guidelines, collective knowledge and data to evaluate the choices at hand.

“Investment professionals often play the role of super forecasters. Of course, they don’t have a crystal ball to see what's going to happen. But based on their experience and inherent decision hygiene, they may have more clarity about what's relatively more probable and what's relatively less probable,” says Sunstein.

A Path to Better Decisions

Anyone can apply decision hygiene to everyday choices. For investments, it means crafting a plan that you can commit to—one that considers your goals and time frame, can handle the ups and downs of the market and is flexible enough when new variables arise.