When we create financial models, it is usually because the client (and the stakeholders) must understand the full extent of their decisions. The financial models provide quantitative data from which they will decide to act.
It goes without saying, financial decisions should not only be based on the results of the financial model, but we cannot deny on the same time the importance of the financial model in the process of making business decisions for our clients.
Understanding the process of making decisions and being able to make the right one is key for our clients therefore it should also be one of us as financial modelers which is why recommend you to read Thinking in Bets: Making Smarter Decisions when You Don’t have All the Facts by Annie Duke.
KEY TAKEAWAYS
- When we create financial model, it revolved around making decisions into real business choices for our clients.
- We recommend you read the book Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts by Annie Duke to have better insights into decision-making process.
- People tend to reverse-engineer our decision based on their outcome. If the outcome is good, the decision taken might have been good but, our decisions should be valued on the premises made at this point.
- Choosing in life can be related as choosing in Poker, this game of deceit and uncertainty where luck can play for us or against us. Chess is by opposition the game of certainty and order by excellence.
- As part of the human evolution, our brain is built for certainty and order which why it is so hard for us to acknowledge the impact of uncertainty and luck. We might bypass uncertainty in identified occasion, but luck will remain as an issue in the process.
- The rest is in the book, you should read it!
| WHAT IS A GOOD OR BAD DECISION? Anne Duke suggests us to do a short exercise: to write down our good and bad decisions we took during this year and to explain why we label them as “good” or “bad” decision. You got them? Right. Chances are, you label good decision because you got good results from it and bad decision because obviously you got wrong results from it. It seems logical, how can we have good decisions from poor results or bad decisions from great results? CHESS VERSUS POKER In Chess, you will probably be right. If you manage to win a game against your opponent, it means you have taken good decisions during the match (or better at least). Losing the match automatically means your decisions during the match hamper you from the victory therefore bad results equal bad decisions. Theoretically, you can win every chess game if you manage to find the right combination of moves. Every move can be analyzed and reverse-engineered to know if it was the right decision. In Chess you know (or have the theoretical capability) of knowing if every decision is good or bad. Aside from Black or White choice, there is no luck involved. World championship will always beat other players because from their skill level they are able to understand the game and to exploit bad tendencies (bad decision) from those players. What about Poker? In Poker, we dealt with different hands (card combinations) and therefore loosing or winning hands Our decision is based on what we know and what we think to know about others and our ability to bluff. Information is in short supply, but you can still manage to have informed decisions based on your skill level. In this game, amateur can win games because of the inherent gap in luck between players. Life (or Business) is Poker, Not Chess After comparing both system, life (or business) is Poker, Not Chess. Hidden information and luck impact our decisions and break the causal link between decisions and outcomes. If you are a decision maker, your priority should be focus on making “smart” decisions. Smart decisions are decision based on rationale method with enough data. Due Diligence is especially important in your process, to narrow potential hidden information and luck. Of course, every project is a bet in the future, and nobody can predict the outcome, sometimes you win sometimes you lose. But if you shift your focus toward the decision-making process you must be able to learn from your unwise decision. As financial modeler, what does that leave us? We need to assist the best we can our clients during their due diligence to identify potential risks and opportunities in any given deal. |
KEY TERMS: ANNIE DUKE, DECISION-MAKING, SMART DECISION, BUSINESS MODELER BOOK
Sources
Annie Duke – Kit Media
Image Photo by Roland Samuel on Unsplash
Photo by Ivan Aleksic on Unsplash
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