A Brilliantly Simple Decision Making Tool

Phil Huber, CIO at Huber Financial Advisors, recently wrote a blog post about his favorite investment book called “My Investing Bible.” The book he references, Expected Returns: An Investor’s Guide to Harvesting Market Rewards by Antti Ilmanen, is probably a bit heady for non-finance professionals, but it contains some real wisdom that we can use beyond portfolio construction for decision making in our professional lives. 

Ilmanen describes “four drivers of return” that we should consider before making an investment decision (don’t worry, we’re going to translate these – stick with me). They include:

1. Historical average returns

2. Risk-based and behavioral theories

3. Forward-looking market indicators; and

4. Discretionary views

In plain English, there are at least four drivers of results that we should consider before we make a decision:

1. What objectively happened in the past with similar decisions? Tip: objective information only, no opinions. Just the facts. 

2. Why do we think it happened? Is there anything that would have been predictive or helpful in real time? Tip: less crystal ball, more best practices.

3. What do we think will happen next based on those previously predictive tools? Tip: our best practices going forward should be…

4. Are there any manual adjustments we’d like to make before we move forward? Why? Tip: you better have a good reason to go against your evidence. 

Think of new client onboarding: What period should we look back on new clients coming on? How should we understand who stayed, left, and why? Could we alter anything to reduce attrition or improve referrals?

Think of employee hiring decisions: how have new hires over some period of time worked out? How should we understand turnover or what worked and didn’t work amongst those new employees? How could we improve the odds of a positive experience for our next new hire? 

There is real value in having a methodology like this on hand. Moving too fast and “shooting from the hip” introduces all sorts of bias into our decision making. When we act strictly on intuition we reduce our chances of replicating anything that worked. Having a method doesn’t mean we’ll have a permanently fixed process, just that we’ll update our evidence every time we need to make an important decision. Whether we’re investing in assets, ourselves or others, we have to ask the questions.