Decision Making Quiz Continued

Amar Pandit , CFA , CFP

A sincere “Thank You” to all of you who responded with your thoughts and explanations.

Majority of the responses I received were favouring option (b) and some chose both while giving their rationale for both. Just a couple said (a) and one said both were wrong.

Here are my thoughts.

At a very basic level, it seems like decision b is great. I can bet that many would opt for b (I had written this already before receiving the responses so not changing it).

However, the information in both the scenarios is not complete.

Yes, by the third week of March, decision (a) looks stupid, and you might be angry with yourself or your financial professional. Decision (b) looks like a genius one.

Assuming both did not do anything, 1 year later, decision (a) looks like the best one and decision (b) looks horrible. You have paid taxes on your gains in option b, and you are sitting out of the market for a correction to happen and you have lost out on a 25%-30% rally from where you had originally got out at.

Why does this happen? Why do we act against our self-interest?

This happens because of a concept called outcome bias but Author Annie Duke calls it “resulting”. She writes “It’s a mental shortcut in which we use the quality of an outcome to figure out the quality of a decision.” She adds “You can go through a red light and get through the intersection unscathed. You can go through a green light and get in an accident.

Does this mean going through a red light was a great decision?

Reflect on this question.

Looking at a single outcome to judge the quality of the decision is going to lead to very poor outcomes in investing. It will lead to lower returns, higher taxes, losing peace of mind and more importantly it will damage the real meaning of investing in your life.