KRYPTONITE FOR DECISION-MAKING

Few things are more important in business, and in life, than good judgment.

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Believe it or not… Judgment is a skill that we learn and cultivate. It isn’t a personal trait that you have or don’t have.

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There are many ways to develop good judgment, but right now I want to focus on being aware of cognitive biases. Cognitive biases are flaws in the way the human mind works.

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They are surprisingly consistent across individuals and cultures – if you think you’re immune, think again.

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For example, people will commonly overweight information that they receive first. Imagine you are researching an investment and you find information that makes the deal look good. Your subconscious mind categorizes this as a good deal. When you later get more information that makes the deal look less attractive, you’re already biased toward making the investment, because of that subconscious sense that it’s a good deal.

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This seems simple, but it’s dangerous and can easily affect anybody. Good investors need to be very careful not to rush to judgment. We always need to look at every deal holistically and avoid rushing to judgment.

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One of the ways I have learned to counter this particular bias is to remind myself and my teammates that nothing is final until everything is final. This is a great approach to vetting and negotiating deals. Until it’s all truly done, everything is subject to examination and negotiation.

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Another cognitive bias that can lead to poor judgment is the universal bias toward attractiveness. Put simply, sometimes we just like things, or people. We might have a bias against buying properties in a certain region. We like doing deals with people we like and it’s well known that attractive looking people have advantages in business. As investors, we need to be self-aware enough to avoid making decisions that are not fully rational, just because we like, or dislike, a particular location or person.

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Long term success in business depends on consistent good judgment. With that in mind, I’ve deliberately set up processes at Alliance that are good ‘decision hygiene’

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For example, decisions around new properties to acquire are presented with our investors as part of the process. This is an extra forcing mechanism for us… to always make sure we’re taking an outside-in holistic view. Thinking about how investors will react helps us step outside potential cognitive biases.

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The market pressure and accountability of exposing our thinking to investors is good for decision making. Biases live in our minds, so it’s healthy to practice thinking about how others will see something. This is a kind of decision making hygiene that I regularly work on, and that I teach my team.

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Few things are more dangerous in investing than self-deception. This probably applies to life as well. Beware of cognitive biases and watch your own thinking. Your good judgment and investing returns depend on it.

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