The Two Types Of Decisions

Lessons from Bezos

“Some decisions are consequential and irreversible or nearly irreversible – one-way doors – and these decisions must be made methodically, carefully, slowly, with great deliberation and consultation. If you walk through and don’t like what you see on the other side, you can’t get back to where you were before. We can call these Type 1 decisions.

But most decisions aren’t like that – they are changeable, reversible – they’re two-way doors. If you’ve made a suboptimal Type 2 decision, you don’t have to live with the consequences for that long. You can reopen the door and go back through. Type 2 decisions can and should be made quickly by high judgment individuals or small groups.

As organizations get larger, there seems to be a tendency to use the heavy-weight Type 1 decision-making process on most decisions, including many Type 2 decisions. The end result of this is slowness, unthoughtful risk aversion, failure to experiment sufficiently, and consequently diminished invention.”

The above is taken from Jeff Bezos’ 2015 annual letter to Amazon shareholders. While his goal was to explain how decisions are made at Amazon, and in turn give an insight into the corporate culture there - the framework that he is describing is useful to bear in mind when we have any kind of decision to make.

Getting our financial house in order can seem like a daunting task. Overly daunting in some cases. When it is the case that there is a lot to do we humans can be prone to freezing and doing nothing. Such decision paralysis does not lead to good outcomes.

If you are in this position, it’s best to start small. Focus on “Type 2” decisions. By making a few small improvements, momentum builds.

Setting up a monthly automated payment into a savings account would be a classic financial “Type 2” decision. This does not need to be the absolute optimum savings rate for you, nor does the deposit account or the investment account that you use have to be the best one available on the market. Perfection is not the goal here, the key is getting started because habits are hard to break.

Increasing the amount that you save into a pension, choosing to invest a small portion of your savings rather than leaving them in cash, consolidating your bank accounts to make your affairs simpler - I would argue that these are all “Type 2” decisions. Likely to yield a good outcome, easy wins, but reversible if really needs be.

A common error that I see people make is that they over analyse small decisions in pursuit of financial perfection.

Perfection is unattainable. It is unrealistic, and therefore not a sensible objective. It can sometimes be difficult for people who have had great success in their lives in areas that reward surgical accuracy (I’m thinking lawyers, doctors, entrepreneurs) to accept this.

But building a financial plan requires us to make assumptions on things like the future rate of inflation, our personal cost of living, investment returns etc. These are known unknowns.

But the biggest of these “known unknowns” is that we cannot possibly imagine what kind of people we will be in twenty years. We can’t imagine what sort of people we will be in six months.

Making any kind of plan for the future requires us to embrace uncertainty, and that can feel uncomfortable. However the alternative is to proceed without a plan - and that is akin to driving blindfolded.

Personally speaking, managing my own finances became a lot less stressful when I stopped trying to solve for the absolute optimum outcome, and instead aimed to avoid big unforced errors.

Wisdom is recognising a “Type 1” decision when we see it. If we over-analyse “Type 2” decisions we divert mental resources which could be better used on the questions that really matter.

I have been thinking about the two types of decisions a lot this week off the back of an initial chat that I had with a prospective client. The discussion focussed on how the client’s mother can efficiently pass wealth onto future generations of her family.

It is a real privilege of this job that we can help our clients to support others financially. I have encountered many folks who bristle at the idea of spending more money on themselves, but light up when the discussion turns to supporting others.

In these kinds of scenarios I am generally a fan of recommending that clients make gifts during their lives rather than through their wills. Would we all not want to see the benefits of our generosity while we are around?

But such gifts can only be made when it is clear that the client’s generosity will not be putting their own financial security at risk. There is a reason that cabin crew tell us to put our own oxygen masks on first.

When a gift is made, generally the door slams shut behind us. Therefore, this is not the kind of decision to be taken on a whim. This is a decision to be made “methodically, carefully, slowly, with great deliberation and consultation".

These are the decisions that matter. Where the counsel of an empathetic, knowledgeable adviser can be worth its weight in gold.

Have a great weekend.