How do you make decisions in uncertain times? Given the higher risks of such times, you should know how to make good decisions. It can help you navigate your situation with confidence.
Fortunately, there is a good principle that you can follow. While it might not make decision making easy, it could make it simple. You can see the factors at play and see the best action to take.
The principle is this: make your decisions as expected value calculations. This is something I learned from Ray Dalio’s Principles.
You see, decision making involves dealing with risks. In most cases, you can’t be sure whether the outcome will be this or that. But you can estimate the probability and return of each outcome. You can then multiply them to get the expected value. The best decision is the one with the highest expected value.
Of course, you don’t need to actually multiply numbers; you only need to mentally estimate them. You can then make effective decisions.
Here are some tips to put this principle into practice.
1. Be well-informed.
To know the expected value of each outcome, you need to estimate its probability and return. The quality of your estimate depends on the quality of your information. The better informed you are, the better your estimate will be. That’s why you should keep yourself well-informed. Feed your mind with high-quality sources.
2. Beware of emotional traps.
Even with good information, you could make bad decisions if you fall into emotional traps. Those traps skew your expected value calculations and lead you the wrong way.
For instance, greed and fear are two major emotional traps in financial markets. Greed makes you buy high while fear makes you sell low. Falling into them is a sure way to lose money.
3. Prepare for the worst.
In making decisions, always be prepared for the worst-case scenario. While its probability might be low, its return is so bad that you should be prepared for it. People tend to be overconfident, so it’s important to keep this in mind.
4. Take risks with low downside but high upside.
If you want to make progress, you must take risks. But what kind of risks should you take? Those with the highest expected values, of course. But what are they? In general, these are risks with low downside but high upside.
This is one reason why I like online business. It’s a kind of business with a low downside but a high upside. If I tried something and it didn’t work, it wouldn’t cost me much. On the other hand, if it succeeded, it could take me to the next level.
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Uncertain times are uncomfortable, but the tips above can help you navigate through it with confidence.
Any thoughts? Feel free to share them in the comments!
