Practical analysis for investment professionals
13 February 2017

Decision Making amid Uncertainty: Six Steps to Improve Your Process

Decision Making amid Uncertainty: Six Steps to Improve Your Process
When I hear the words “President Donald Trump” and “investing” in the same sentence, another word that immediately springs to mind is “uncertainty.”

Even the headlines in the news media are filled with uncertainty:

Uncertainty is also on Seth Klarman’s mind. In a private letter to his investors about investing during the age of President Trump, Klarman had this to say:

“The big picture for investors is this: Trump is high volatility, and investors generally abhor volatility and shun uncertainty. Not only is Trump shockingly unpredictable, he’s apparently deliberately so; he says it’s part of his plan.”

Meanwhile, Mohamed El-Erian, author and chief economic adviser to Allianz, characterized 2017 as a year of “heightened ‘unusual uncertainty.’

Uncertainty is everywhere.

About a day or so after reading the Klarman article, a copy of Organizational Alpha: How to Add Value in Institutional Asset Management, the latest book from Ben Carlson, CFA, landed on my desk.

Carlson, director of institutional asset management at Ritholz Wealth Management, and author of the blog, A Wealth of Common Senseis one of the smartest writers in the financial blogosphere.

I started reading.

Carlson’s prose is lean and his style conversational. And at just 80 pages, Organizational Alpha is a quick read.

One of my favorite aspects of the book is that Carlson begins each chapter with five questions to consider as you read that section. If you’re an institutional investor, I’d recommend printing out the questions and keeping them as a reminder of what you need to be thinking about and the questions you should be asking.

Carlson says he has “toyed around” with the idea of organizational alpha for a while “as a way to describe the importance of people, culture, process, decision-making, planning, balance, and philosophy above all else when managing the institutional investment process.” He points out that the best investment ideas “are useless without the ability to execute and make rational decisions in real-time.”

Which brings us to decision making.

I’m not in the money management business, but I do have to make a lot of decisions. And lately I’ve been wondering how I can make smarter choices amid so much political and economic uncertainty.

Carlson tackles decision making in one of the chapters and offers six suggestions for improving the process:

  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.”
  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.
  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.”
  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.”
  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.”

The simplicity (and common sense) of Carlson’s advice reminded me of Harold Pollack’s index card of financial advice.

There’s not much I can claim with certainty these days, but one thing I do feel certain about asserting is that Trumponomics will remain an important market influence in 2017. And that means a lot more uncertainty is in store for all of us.

With that in mind, I penned an index-card version I’m calling “Ben Carlson’s Index Card of All the Decision-Making Advice You’ll Ever Need.” You don’t need to be an institutional investor to benefit from his recommendations. I plan to keep it handy.


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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images/FrankRamspott

About the Author(s)
Lauren Foster

Lauren Foster was a content director on the professional learning team at CFA Institute and host of the Take 15 Podcast. She is the former managing editor of Enterprising Investor and co-lead of CFA Institute’s Women in Investment Management initiative. Lauren spent nearly a decade on staff at the Financial Times as a reporter and editor based in the New York bureau, followed by freelance writing for Barron’s and the FT. Lauren holds a BA in political science from the University of Cape Town, and an MS in journalism from Columbia University.

11 thoughts on “Decision Making amid Uncertainty: Six Steps to Improve Your Process”

  1. Clement Gavi says:

    On what becomes, one can not affirm anything certain, the investment being prospective, so it is what is in progress with respect to its results. The risk is therefore instress to the investment. And what is risk is volatility which is the amplitude of income fluctuations. Uncertainty in terms of volatility can be mitigated by a mixing of assets, ie, by the choice of assets that are decorrelated.

  2. Harold A Pollack says:

    I like it!

  3. Osvaldo Garcia says:

    Look kybernetes journal
    Dancing with complexities and uncertainties

  4. Muhammad Ahsan Manzoor says:

    Ahsan Manzoor said:

    Point 3 and 6 just made my day.

  5. Henry says:

    ”Why Has Gold been The Big Winner” ???
    Tell me, when did gold ever lose?

    At times of uncertainty folk just swap their dollars for something that’s almost certain to never go down in value.

  6. Nana Buanya says:

    Point 6 makes a difference in effective decision making when time constrained.
    Great piece!

  7. Clement Gavi says:

    ‘Decision Making amid Uncertainty: Six Steps to Improve Your Process’

    Decision is a response as what a given situation calls as solution. Since the given isn’t in the order of typologies,nor universal, the given has its singularity, its particularity. Thus, it is this particularity, singularity the decision must manifested.

    Since uncertainty interven necessarily in a structure, the signs of uncertainty are given in the structure or the structure can suggest the forms of the uncertainty. Thus, attentiveness to the structure in which decision amid uncertainty is an event becomes tool of decision. Because the structure and uncertainty and decision are in a coexistence relationship.

  8. Russell says:

    Very valuable points! Thanks for this Lauren. I find that with this area that saying as objective and logical as possible helps – regardless of how hard that can be.

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