1. Create a simple formula for making a big decision. What are the three to five key points? Assign a certain weight to each point, according to its importance. For example, when I choose a car, I put forty percent of the weight of my decision on mechanical reliability; forty percent on price; twenty percent on good mileage. You might have a different system for weighing what matters most to you. Make sure that your total adds up to one hundred percent.
2. Guard against motivated reasoning. Be less of a lawyer (starting with a conclusion—“I can afford that BMW”—and finding evidence to support it) and more of a scientist (following facts to a conclusion—“All told, the BMW will cost me nine hundred and seventy dollars a month to own and operate. Can I afford that?”).
3. Stop and consider why your thinking may be wrong. One way to do this is to hold a pre-mortem: “If this turns out badly, what would be the three most likely reasons why?”
- Stop and ask yourself:
a. Am I pursuing sunk costs? (Chasing lost money and/or time — loss aversion)
- b. Am I embracing too much risk to prevent a loss? (Also loss aversion)
- c. Am I assuming a best case scenario for the results of my decision? (Myopic forecasting)
- If yes, what is a more balanced forecast?
- e. Am i considering the impact of randomness and luck? (The illusion of predictability)