Learn how to make Decision Effectively by Ray Dalio
Book Notes : Principle by Ray Dalio - Chapter 5
5.1 Recognize that
the biggest threat to good decision-making is harmful emotions.
decision making is a two-step process(first learning and then deciding).
Learning
Must come before deciding.Your brain stores different types of learning in our subconscious memory, your rote memory banks, your habits, and all. But no matter how you acquire your knowledge or where you store it, what's more, important is that what you know paints a true and rich picture of realities that will affect your decision.
That's why it always pays to be radically open-minded and seek out believable others as you do your learning. Many people have emotional trouble doing this and block the learning that could help them make better decisions.
Deciding
It is the process of choosing which knowledge should be drawn upon - both the facts of this particular "what is" and your broader understanding of the cause-effect machinery that underlies it - and then weighing them to determine a course of action, the "what to do about it"
This involves playing different scenarios through time to visualize how to get an outcome consistent with what you want. To do this well, you need to weigh first-order consequences against second and third-order consequences and base your decisions not just on near-term results over time.
Learning well
Getting an accurate picture of reality ultimately comes down to two things: being able to synthesize accurately and knowing how to navigate levels.
Synthesis is the process of converting a lot of data into an accurate picture. The quality of your synthesis will determine the quality of your decision-making. This is why it always pays to triangulate your views with people who you know synthesize well. This raises your chances of having a good synthesis, even if you feel like you've already done it yourself. No sensible person should reject a believable person's views without great fear of being wrong.
To synthesize well you must :
Synthesize the situation at hand
Synthesize the situation through time
navigate levels effectively
5.2 Synthesize the situation at hand
Every day you are faced with an infinite number of things that come at you. Let's call them "dots".To be effective, you need to be able to tell which dots are important and which dots are not. Some people go through life collecting all kinds of observations and opinions like pocket lint, instead of just keeping what they need. They have "detail anxiety, "worrying about unimportant things. Sometimes small things can be important - for example, that little rattle in your car’s engine could just be a loose piece of plastic or it could be a sign your timing belt is about to snap.
The key is having the higher-level perspective to make fast and accurate judgments on what the real risk is without getting bogged down in details.
Remember:
One of the most important decisions you can make is who you ask questions of
Don't believe everything you hear
Everything looks bigger up close
New is overvalued relative to great
Don't over-squeeze dots
5.3 Synthesize the situation through time.
To see how the dots connect through time you must collect, analyze and sort different types of information, which isn't easy.
Keep in mind both the rates of change and the levels of things and the relationship between them.
When determining an acceptable rate of improvement for something, it is its level about the rate of change that matters.
Be Imprecise
Understand the concept of "by-and-large" and use approximations. Because our educational system is hung up on precision, the art of being good at approximations is insufficiently valued. This impedes conceptual thinking. For,x example when asked to multiple 8 by 12, most people do it the slow and hard way rather than simply rounding 38 up to 40, rounding down 12 to 10, and quickly determining that the answer is about 400.
Remember the 80/20 rule and know what the key 20 percent is.
The 80/20 rule states that you get 80 percent of value out of something from 20 percent of the information or effort.
Understanding this rule saves you from getting bogged down in unnecessary detail once you've gotten most of the learning you need to make a good decision.
Be an Imperfectionist
Perfectionist spends too much time on little differences at the margins at the expense of the important things. There are typically just five to ten important factors to consider when making decisions. It is important to understand these well, though the marginal gains of studying even the most important things past a certain point are limited.
5.4 Navigate levels effectively
Reality exists at different levels and each of them gives you different perspectives. It's important to keep all of them in mind as you synthesize and make decisions, and to know how to navigate between them.
We are constantly seeing things at different levels and navigating between them, whether we know it or not, whether we do it well or not, and whether our objects are physical things, ideas, or goals. For example, you can navigate levels to move from your values to what you do to realize them on a day-to-day basis. This is what that looks like outline:
1 The High-Level Big Picture: I want meaningful work that's full of learning.
1.1 Subordinate Concept: I want to be a doctor.
Sub-Point: I need to go to medical school.
Sub-Sub point: I need to get good grades in the sciences.
Sub-Sub-Sub Point: I need to stay home tonight and study
To observe how well you do this in your own life, pay attention to your conversations. We tend to move between levels when we talk.
a. Use the terms "above the line" and "below the line" to establish which level a conversation is on.
An above-the-line conversation addresses the main points and a below-the-line conversation focuses on the sub-points. When a line of reasoning is jumbled and confusing, it's often because the speaker has gotten caught up in below-the-line details without connecting them back to the major points. An above-the-line discourse should progress in an orderly and accurate way to its conclusion, only going below the line when it's necessary to illustrate something about one of the major points.
b. Remember that decisions need to be made at the appropriate level, but they should also be consistent across levels.
You need to constantly connect and reconcile the data you're gathering at different levels to draw a complete picture of what's going on. Like Synthesizing in general, some people are naturally better at this than others, but anyone can learn to do this to one degree or another. To do it well, it’s necessary to:
Remember the multiple levels exist for all subjects.
Be aware of what level you're examining a given subject.
Consciously navigate levels rather than see subjects as undifferentiated piles of facts that can be browsed randomly.
Diagram the flow of your thought processes using the outline template.
When you do all this with radical open-mindedness, you will become more aware not just of what you're seeing, but what you're not seeing and what others, perhaps, are. It's little like when jazz musicians jam; knowing what level you're on allows everyone to play in the same key.
Decide well
Using decision-making logic to produce the best long-term outcomes has become its science - one that employs probabilities and statistics, game theory, and other tools. While many of these tools are helpful, the fundamentals of effective decision-making are relatively simple and timeless - in fact, they are generally encoded on our brains to varying degrees. Watch animals in the wild and you'll see that they expand to find food. Those that did this well prospered and passed on their genes through the process of natural selection; those that are poorly perished. While most humans who do this won't perish they will certainly be penalized by the process of economic selection.
There are two broad approaches to decision making:
Evidence/logic-based (Which comes from the higher level of the brain)
Dubconscious/emotion-based (which comes from the lower level animal brain)
5.5 Logic, reason, and common sense are your best tools for synthesizing reality and understanding what to do about it.
Unfortunately, numerous tests by psychologists show that the majority of people follow the lower-level path most of the time, which leads to inferior decisions without their realizing it.
As Carl Jung put it, "Until you make your unconscious conscious, it will direct your life and you will call it fate."
It's even more important that decision-making be evidence-based and logical when groups of people are working together. If it's not, the process will inevitably be dominated by the most powerful rather than the most insightful participants, which is not only unfair but suboptimal. Successful organizations have cultures in which evidence-based decisions making is the norm rather than the exception.
5.6 Make your decision as expected value calculations.
A. Raising the probability of being right is valuable no matter what your probability of being right already is.
I often observe people making decisions if their odds of being right are greater than 50 percent. What they fail to see is how much better off they'd be if they raised their chances even more(you can almost always improve your odds of being right by doing things that will give you more information).
The expected value gain from raising the probability of being right from 51 to 85 percent (i.e by 34 percentage points) is seventeen times more than raising the odds of being right from 49 percent(which is probably wrong) to 51 percent (which is only a little more likely to be right).
Think of probability as a measure of how often you're likely to be wrong. Raising the probability of being right by 34 percentage points means that a third of your bets will switch from losses to wins.
THINKING → PRINCIPLES → ALGORITHMS → Great Decisions
