Carlson’s decision making process

2 minute read

* Note: this is a backdated post from something I took notes on in the past

Lauren Foster wrote about her takeaways from Ben Carlson’s book, and I thought her thoughts were a good summary:

1. Perform a pre-mortem. “The only certainty about financial markets is the fact that you are bound to be surprised by what happens,” he writes. “The trick is to make sure that you’re never surprised that you’re surprised. Uncertainty needs to be built into the decision-making process. Things will go wrong.”

  • Similar to what I believe Kahneman wrote in Thinking, Fast and Slow

2. Document and use checklists. It’s important to write down the reasons behind all your decisions. Note the “what?” and “why?” “Writing down the reasons for all your decisions can lower the chances of hindsight bias creeping in and compounding potentially poor outcomes,” Carlson writes.

  • As I’ve stated in my About Me section, I like checklists. As one of my military commanders used to say, men get tired but checklists don’t

3. Stay humble. “Markets are complex adaptive systems,” he says. “No one can forecast what will happen with either the markets or the economy on a consistent basis. . . . Be humble in your approach or the market will humble you.”

4. Avoid blame and excuses. “You’re not always going to get the best outcomes but that’s not the point of a good process,” Carlson writes. “A good process is about making high-probability decisions. No one is good enough to be right all the time. . . . You have to own your own decisions. You won’t always like the outcomes, but trying to blame others for your decisions is a good way to ruin a useful process.”

  • As always, emphasis on process rather than outcome

5. Scenario analysis. “The biggest benefit of using scenario analysis software is that it allows you to test your current assumptions and risk-return expectations,” he observes. “It allows you to look at best and worst case scenarios and, more importantly, plan a wide range of outcomes. These simulations will never help you predict the future, but they can help you prepare for it.”

  • Not sure what scenario analysis software he’s using here. My assumption is some form of Monte Carlo simulation, though I wonder what Taleb will think about that

6. Make it a habit. “Investors assume they need to do extraordinary things in order to succeed, but they do so at the expense of the ordinary things that are important, yet often overlooked,” writes Carlson. “Having a solid process in place that allows you to make the right decisions without thinking about them is such an unbelievably huge advantage when dealing with the inherent uncertainty in the financial markets. . . . Making fewer decisions under stressful situations is a net positive.”