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What is a decision and how one is made? - by Caspar Berry

I start from the standpoint that ALL decisions are in fact investment decisions. This in itself can sometimes change the way people view all their decisions which are, in fact, allocations of scarce resources under conditions of uncertainty. This is why the formalised science of decision making (and in fact the subconscious process) uses the same kind of calculation that all investment calculations are based on and why this is the same as the classic risk calculation - multiplying probabilities of events by the impact of their occurrence. Indeed, this is origin of the oft-used but little understood term: "calculated" risk.

Most decisions are not actually investments of money (though some are) most are investments of other limited resources such as time, energy, status or reputation in a world where the exact outcome of the decision are unknown. At the point of making the decision, however, the decision maker actually projects themselves into a series of uncertain futures and assesses potential upsides and downsides of a variety of different courses of action.

This future-projection is fascinating because sometimes we do it in an instant without being consciously aware of it and sometimes we do it thoughtfully over the course of hours days or weeks. Sometimes we call this scenario planning. And, again, we can see that what we call a "decision" is, something which sometimes feels "instinctive" but is also something that we have codified and formalised and have a variety of different names for such as "strategy", "planning" or "risk assessment".

In all these situations however, the most important point is that the decision-maker - both the CEO in the boardroom and the ten year old in the playground - are actually trying to optimise their return on investment. Within this process - which forms the meeting point of psychology and micro economics - is the whole arena of behavioural economics, that is the extent to which the people making decisions are actually rational and capable of maximising their ROI in what we might meaninglessly call a mathematically accurate way.

This may come about as a result of competitive advantage (being first or fastest) or by special ability (patent or inimitable talent) and is defined in poker (and sometimes business too) as having "the edge"! The more efficient and fast moving/liquid the market the quicker the edge is eroded and so it is crucial to the decision-maker to keep and maintain this edge by whatever means.

The bottom line is that in a world of uncertainty we are all impacting each other. Our world is so complex that accurately and effectively predicting the future at the point of making a decision is always going to be an unobtainable ideal and therefore all we can do is make an assessment; a probability assessment of what is to come.

So if all decisions are investment decisions then all judgements and assessments are effectively probability assessments. At the simplest level, these assessments are "I think I trust this person" or "I don't think it's going to work". In more complex scenarios, we assess how a process refinement will likely impact those down the production line. But we never know for sure. We're just assessing: projecting ourselves into unknown futures and applying emotional or mathematical probabilities to likelihoods of different outcomes.

Whether consciously or intuitively, information about the past and the present is the raw material we use to hone our assessments and scenario plan for the future. As decision makers in the twenty first century, the decisions that we make are being hugely informed by computers ability to crunch vast amounts of data. But ultimately predictions made about the future in this way will always depend on the algorithms and models that we create to assess it. For the foreseeable future it will require intuition and insight to establish how to process that data in order to more accurately assess the future. For the future is not the past and computers are currently incapable of applying the insights necessary to know what to do with information about one in order to predict the other.

By completely understanding the decision-making process however we can get a better handle on what information we should be supplying and demanding to ourselves and those around us. By appreciating what is happening inside our heads in a split second or in discussions over many months, we can gain insight into how we decide at the moment and how we can do so better in the future. And the better we can use this information and accurately assess the future the more prescient our decisions become and the more likely we are to have that competitive advantage and beat the market forever or most likely for a while!