reducing hindsight bias through decision journals

One of the key modifications that I’ve made to my investment process this year, is the introduction of a decision journal. I came across the concept many years ago but never followed through with the implementation. That changed after I read The Emotionally Intelligent Investor, by Ravee Mehta. Throughout the book he preaches the importance of understanding one’s emotions and not simply supressing them. By recording our emotional state and expectations at the time of making an investment, we can create a bridge between the rational and emotional parts of the brain and reduce the risk of subconsciously altering our memories in the future.

 

A decision journal is essentially a set of questions that you answer each time you decide on a course of action. The important point is that you write down your thoughts immediately after the decision has been made to ensure the accuracy of the data points. Common points might include:

  • Time of day
  • Overview of the decision made
  • What you expect to happen and why
  • Your mental & physical state at the time of the decision

For me, the most important points to note down are what you expect to happen and why. This is because the focus of my decision journal is to limit hindsight bias. By writing a concise note on why I either bought or sold a stock and what I expected to happen at the time of the decision, I reduce the risk of creating a narrative to suit the outcome later on. These data points provide the bedrock upon which I review my investment decisions.

 

Humans have a natural tendency to not want to be wrong. As such, the creative part of our brain often “invents” a narrative to explain how you successfully predicted an event before it occurred. By recording exactly what you think will happen, at the time of the decision, you can more objectively review your decision-making process and the outcome that eventuated. This allows an analysis of the role that skill and luck played in each investment.

 

A screenshot of my decision template, is below. For more information on decision analysis, refer to the always insightful Farnam Street Blog

Decision template

Another habit I’ve introduced this year is always carrying a journal to keep track of thoughts and ideas I have. Ideas tend to strike me at all hours of the day/night and historically, I would quickly forget them. By always having a pen & paper nearby, I can record these thoughts for review at a more appropriate time. To ensure that I can always record my decision at the time they occur and with all the relevant data points, I simply placed a blank copy of my template on the front page of my journal:

Journal

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