Decision making

Before you buy a product, you go through a decision making process. During this process, personal preferences are weighed and the best choice is being made. At least, that is what everyone thinks their decisions are made. However, often a decision is made in an intuitive way, without weighing all different alternatives. This certainly is the case in the decision making process for investments.

Most people (and investors) think that they base their decisions on a rational process. But is this the case? Do you weigh the different alternatives before you decide where to invest your money? And can anyone make a decision on their own when they have to choose between different complex products, like investment products? To get an answer on these questions, you first have to know how the decision making process works.

Two types of decision processes

Two types of decision processes exist, the rational and the intuitive process.
Decisions which are being made by the intuitive decision making process, are fast decisions. Not all available information is taken into account, and the decision is based on existing knowledge. This process takes place unconsciously, and you do not even know that you already made your decision.
Decisions made by the rational process are decisions which are based on all information that is available. Different alternatives and scenarios are weighed before the choice is made.
Most choices are primary made by the intuitive process, with a little bit of help from the rational process. Some alternatives are taken into account, but because there is too much information available, it is not possible to only use your rational process of decision making.
Of course, important decision, like the ones about how to invest your money, should be made by the rational process.

Information

To make a rational decision, you should have the right information. It is very easy to get a lot of information these days, but the question of reliability and usability of this information remains unanswered. This is why it is important to keep on checking the sources of this information and throw away the information which is misleading or otherwise incorrect. You don’t want to base a decision on wrong data.
What is mentioned above is certainly the case for investment decisions. The information that is being used for an investment decision, should first be filtered. Important choices to make to filter the information are the importance and the relevancy of the information. Besides that, you should limit your range of investment possibilities, then you can also scope the needed information and throw away the information that will not help you.

Research and advice

Information can come from research which has been done by others. This research can be conducted by scientists, other investors and investment advisors. When you want to use this information as input for your decision making process, you really should take a look at how this research has been conducted. Make sure you know how the researcher came to his results. Also take a look at what has been researched, and what not. Try to find the rationale behind why something was included, and why something was excluded from the scope of the research. If the reason behind the scope is not clear, or does not seem logical to you, you certainly should not use the research as input for your decision.

In and out of the box

When weighing alternatives and thinking of scenarios, think in and out of the box. By thinking in the box, you can use regular events as the basis for your decision. But to get a complete picture, you also should take into account the events that do not happen that often, but will influence the outcome of your decision making process. Some unusual events will change the way you view the world significantly.
Think for example what a specific event will mean for the company or for the investment product you want to invest in. Will it influence your returns in a positive or negative way?
By thinking in- and outside the box, you will be able to see the risks in advance, and more likely, you will be able to benefit from extraordinary events.

Remember: Always be critical when making choices and try to use the right information for your decisions. Try not to use too much information when making a decision, but decide in advance what you will take into account and what not. The stock market will react on new information, so be sure you are the first to get this new information!