Concept of Decision Fatigue [DF]
So as the name itself suggests, it’s the fatigue set by the ‘n’ number of decisions we need to take on a daily basis. A Google Search shows that an average individual makes around 35000 decisions every day. Frankly, I don’t believe this number. But definitely, it must be in more than a thousand a day. They can be very simple decisions like - what shirt/pants to wear, which belt or shoe or watch to match with it. What exercise to do/ what to eat for breakfast/lunch/dinner etc etc etc… These are daily trivial routine decisions. But we must make more difficult daily decisions in our business / professional life. They are more demanding and resource-hungry on our brain power.
Image Credit - Decision Fatigue - The Decision Lab
It is well known that decision-making is one of the most tiring and wearying tasks, which is why people like Barack Obama. Bill Gates only wear two suit colours - Dark Blue / Dark Grey. Former Apple CEO Steve Jobs to present billionaires such as Mark Zuckerberg, Jeff Bezos, Phil Knight, and Warren Buffett all wear very simple clothes. As they are all very passionate about their work, they don’t waste their mental bandwidth on such trivial daily decisions.
As per Mihaly Csikszentmihalyi, (the author of the book - The Flow: The Psychology of Optimal Experience), we have a limited cognitive capacity. Our cognitive limit is 7 bits of information at a time and we have a capacity for 126 bits per second. And imagine this, 60 bits are required to listen to one person only. So now we know, why we get confused in meetings when many people start talking aloud together. And this is also one of the simple reasons why the MULTI-TASKING doesn’t work. Our brain simply can’t process information of more than 126 bits per second
So coming back to DF. It’s far more important in investing as it deals with MONEY, which is an essential ingredient of modern human life.
Where can we see this DF in investing? In so many places we have to decide between so many choices
Large caps / mid-caps / small caps
Direct stocks / MF, if direct stocks, then Long term / Day trading / F & O
Which asset - Equity / Debt / Gold / Real Estate
Which Life Insurance / Health Insurance ( With so many choices, the DF
sets in & we simply buy the policy suggested by the agent )
And the list goes on and on.
In Behaviour Finance,
This DF can cause us mentally paralysed and follow what others are doing - Herd Mentality.
This DF can cause mentally paralysed and do nothing - Status Quo Bias / Decision Avoidance.
DF forces our brain to shift from SYSTEM 2 to SYSTEM 1. So we simply can’t go to any second/third-order thinking.
So how to avoid this DF, not only in investing but also in daily life?
It’s again not easy, especially in our present SM age due to si many distractions. But we can surely follow a few things.
1 -The concept of HALT.
What is HALT? - AVOID taking major decisions when you are HUNGRY, ANGRY, ALONE & TIRED. This way at least you can avoid major mistakes while making critical decisions.
2 - Process is more important than Outcome
Following the process frees up our mental bandwidth so that we can FOCUS more on the given tasks. And if we follow the process, the outcome will take care of itself.
Pasting a link below about Micheal Phelps, the most successful Olympian with a total of 28 medals. This clearly states the importance of simple daily fixed routines.
If you are too busy with your professional life, simply follow the process of SIP in MFs to achieve financial independence early.
3 - CHECKLIST.
When it comes to individual stock picking, simply follow the checklist.
Check-list offers 2 very simple advantages
- It ‘outsources’ your decision-making process. So less chance of any decision fatigue.
- It removes the EMOTIONS from the equation.
Any more solutions that you can think of? Please suggest them in the comments.