Make Smart(er) Decisions And Avoid Bad Ones – By Shane Parrish

Photo By Sadeq Mousavi

Written by: Shane Parrish

Curator: GRSG



I was two weeks into my job at an intelligence agency on September 11, 2001 when the world suddenly changed.

The job I had been hired to do disappeared. I had a computer science degree; I came from a world of 1s and 0s, not people, families, and interpersonal dynamics. I was thrust into a series of promotions for which I had received no guidance, that came with responsibilities I had no idea how to navigate. Suddenly, my decisions affected not only my employees but their families. Not only my country but other countries. The only problem? I had no idea how to make decisions. I only knew I had an obligation to make the best decisions I could.

To improve my ability to make decisions, I looked around and found some mentors. I watched them carefully and learned from them. I read everything I could about making decisions. I even took some time off work to go back to school and earn my MBA, hoping that I would finally learn how to make better decisions — as if that was some end state rather than a constantly evolving journey.

My belief that the MBA program was a good use of my time eroded quickly. When I showed up to write an exam only to find out it was open book test I realized my expectations were entirely wrong and in need of updating. Some days, I couldn’t tell whether I was in a master’s program or grade school? And yet that is where everything changed for me.

Thanks to the internet, I was no longer limited to the best teachers in my organization or university. I went from theoretical classroom examples that were completely divorced from the real world to the wisdom behind the achievements of one of the most successful businesses of all time. What I discovered in Warren Buffett and his longtime business partner Charles Munger opened a door that has never shut.

“The older I get the more I realize how many kinds of smart there are. There are a lot of kinds of smart. There are a lot of kinds of stupid, too.”

— Jeff Bezos

Mental Models

Munger has a way of thinking through problems using what he calls a broad latticework of mental models. Mental models are chunks of knowledge from different disciplines that can be simplified and applied to better understand the world. The way he describes it, they help identify what information is relevant in any given situation, and the most reasonable parameters to work in. His track record shows that this doesn’t just make sense in theory but is devastatingly useful in practice. The last eight years of my life have been devoted to identifying and learning the mental models that have the greatest positive impact and trying to understand how we think, how we update, how we learn, and how we can make better decisions.

In life and business, the person with the fewest blind spots wins1. Removing blind spots means we see, interact with, and move closer to understanding reality. We think better. And thinking better is about finding simple processes that help us work through problems from multiple dimensions and perspectives, allowing us to better choose solutions that fit what matters to us. The skill for finding the right solutions for the right problems is one form of wisdom.

This website is about the pursuit of that wisdom, the pursuit of uncovering how things work, the pursuit of going to bed smarter than when we woke up.

Decisions based on improved understanding will be better than ones based on ignorance. While we can’t predict which problems will inevitably crop up in life, we can learn time-tested ideas that help us prepare for whatever the world throws at us.

Decision Making

Think about the state of your life, your career, your business, your major relationships — anything consequential to you.

How many truly important decisions have you already had to make, and with the benefit of hindsight, how well did you make them? How many decisions did you make today? How did you make these decisions? Is there a better way?

Not all decisions matter equally. Most decisions, like where to grab a sandwich today, are unimportant. The consequences of these decisions don’t matter. Yet some decisions are critical — they change our lives.

We must make choices about whom to trust, where to live, and whom to marry. The outcomes of these decisions reverberate for years. Yet most of us don’t have the tools we need to make these decisions.

The tool we default to most when making meaningful decisions is the pro-con list, where you list all the positive things that happen on one side and the negative things on the other trading them off. While useful when deciding what to have for lunch, the approach has meaningful shortcomings.

“I regard it as a criminal waste of time to go through the slow and painful ordeal of ascertaining things for one’s self if these same things have already been ascertained and made available by others.”

—Thomas Edison

SMART People Make Terrible Decisions

Even smart people are awful at making decisions. Think about decisions like these:

  • Napoleon deciding to invade Russia (and Hitler doing it again 130 years later)
  • George Bush deciding to invade Iraq
  • An editor deciding to publish O.J Simpson’s If I Did It
  • Chris Webber choosing the timeout he didn’t have in the 1993 Final Four
  • NASA’s decision to ignore the O-ring issues on the Challenger
  • President Kennedy’s famous blunder to continue the Bay of Pigs operation inherited from the previous administration (a mistake he quickly learned from)
  • Margaret Thatcher deciding to get behind a “poll tax” that led to her ouster by her own party
  • Juergen Schrempp, the CEO of Daimler-Benz, deciding to merge with Chrysler despite massive internal opposition and a general history of big M&A deals working very poorly
  • Jim Cramer looking at Bear Stearns in 2007 and calling it a “BUY”
  • …and a hundred thousand more…

These were catastrophic decisions made by people who were, in some sense, professional decision-makers. They had impeccable credentials and judgment, and yet they made poor decisions due to poor judgment, a too-limited mental representations of the world, or just plain stupidity.

Sources of Stupidity

There are a lot of reasons we fail to make the best decision possible at the time.

Let’s take a look at five of the biggest ones:

1. We’re (sometimes) stupid. Of course, I like to think that I’m rational and capable of interpreting all of the information in a non-biased way. Only I’m not. At least not always. There are situations that increase the odds of irrationality, for instance when we’re tired, overly focused on a goal, rushing, distracted or interrupted, operating in a group, or are under the direction of an expert2.

2. We have the wrong information. In this case, we’re operating with the wrong facts or our assumptions are incorrect.

3. We use the wrong model. We use models to make decisions. The quality of those models often determines the quality of our thinking. There are a variety of reasons that we use false, incomplete, or incorrect models. For instance, we’re prone to using less useful models when we are a novice or we operate in a domain outside of our area of expertise. The odds of the wrong model also increase as the pace of environmental change increases.

4. We fail to learn. We all know the person that has 20 years of experience but it’s really the same year over and over. Well, that person is sometimes us. If we don’t understand how we learn, we’re likely to make the same mistakes over and over.

5. Doing what’s easy over what’s right. You can think of this as looking good over doing good.  In this case, we make choices based on optics, explainability, politics, etc. Mostly this comes from not having a strong sense of self and seeking external validation or avoiding punishment.

Luckily, we can take steps to reduce the odds of stupidity and increase the odds of good decisions in each of these categories.

“The frog in the well knows nothing of the mighty ocean.”

—Japanese Proverb

Intelligent Preparation: The World Is Multidisciplinary

We live in a society that demands specialization. Being the best means being an expert in something. Letters after your name and decades in the trenches of experience are required before you can claim to know anything. In one sense there is nothing wrong with this — specialized knowledge is required to solve problems and advance our global potential. But a byproduct of this niche focus is that it narrows the ways we think we can apply our knowledge without being called a fraud.

So we think physicists can’t teach us about love; mathematicians can’t instruct us on how to run a business; poets don’t know squat about “my life.” And bloggers can’t contribute to philosophy.

I don’t believe this is true.

Knowledge is hard to come by.

It takes work and commitment, and I think we owe it to ourselves to take it out of the box it comes in and experiment with it. We should blow past conformity and apply all the knowledge at our disposal to the problems and challenges we face every day.

Think about it. Over time you’ve picked up a lot of fundamentals about how the world works. You may have read a book about the Manhattan Project and the building of the nuclear bomb that was launched at Hiroshima. This story conveys the awesome power of self-sustaining nuclear reactions. Have you ever thought about applying those ideas to your life? You should.

How We Decide

When was the last time you thought about how you decide?

If you’re like most people, you’ve never been explicitly taught how to make effective decisions. You make decisions like a golfer who never took any lessons: miserable with the state of your game and yet not seeking to learn a better swing, and instead hoping for the best every time you lift the club. Hoping that this time your choice will finally work out.

In the early 1980s, Charlie Munger and his partner Warren Buffett realized that a Savings & Loan operation they owned, as with the rest of the industry, was doomed to fail miserably due to forces outside of their control. At a time when almost none of their peers were taking action, they changed course dramatically, massively reducing the effect of the bank’s failure on the rest of their business holdings. These two men knew they had to act much differently than their peers.

It worked: The S&L industry collapsed, yet Munger and Buffett escaped with barely a scratch. They saved themselves a great deal of stress and financial pain by applying a uniquely effective system of organized common sense. In hindsight, it seems like an obvious good decision; at the time, it seemed odd and unusual.

The lesson for us is that the people making consistently good decisions take advantage of how the world works. That’s wisdom.

Real knowledge of the art of decision making, which remains true across time and circumstances, eras and epochs, can help increase the odds that we get what we want and reduce costly mistakes.

While everyone else is guessing, falling into old patterns, blindly following cognitive biases, we can be clear-headed and laser focused.

That’s what Farnam Street is all about.

Here are some examples of applying — or failing to apply — knowledge about how the world really works.

  • It doesn’t matter how smart you are if you don’t realize where things are additive and where they are multiplicative. Nikola Tesla failed to understand Multiplication by Zero when he failed to realize that poor relations with others affected his life. While the Serbian-American was a brilliant inventor, he had difficulty relating to others, which made him difficult to work with. This problem cost him a Nobel Prize and a fortune that today would likely have made him the richest man in the world.
  • While we all rely on maps, which are reductions of complexity, to make decisions, they are not always accurate. General George S. Patton Jr. understood that the map is not the territory. When he visited the troops near Coutances, he found them sitting on the side of the road, studying a map. Responding to Patton’s inquiry as to why they had not crossed the Seine, the troops informed him that they were studying the map and could not find a safe place to wade across. Patton informed them that he had just waded across it and it was not more than two feet deep.
  • While we all like to be in the sexy industries, that desire shows an under-appreciation for the laws of thermodynamics. Smart companies like Berkshire Hathaway, guided by legendary investor Warren Buffett, understand that contrast is important. Sexy internet businesses are rarely effective, no matter how good they are, because the others are nearly just as good. What you want is contrast — to be the big fish in a small pond. And when you analyze the types of investments he’s made over the years, that’s what you find. If you’re going to compete with people, you want to compete with people who are way less sophisticated than you.
  • Understanding and applying the mental model of relativity helped Michael Abrashoff take the worst-performing ship in the US Pacific Fleet and turn it into the best. In his book, It’s Your Ship, he wrote: “The most important skill a skipper can have is the ability to see through the eyes of the crew.”

This website is about understanding and applying these time-tested mental models. Knowing how the world works means that you can stop fighting reality — and yourself along with it.

The Top General Thinking Concepts

Combining intelligent preparation — learning about the big time-tested ideas from multiple disciplines — with general thinking frameworks will dramatically improve your decision-making skills. These thinking frameworks help you look at problems through different lenses. We’ve compiled a list of ten of them, but here are the top three:

  • Inversion — Otherwise known as thinking something through in reverse or thinking “backwards,” inversion is a problem-solving technique.
  • Second-Order Thinking — Ask yourself, “And then what?”
  • The Map Is Not the Territory —The map of reality is not reality itself. If any map were to represent its actual territory with perfect fidelity, it would be the size of the territory itself.

The Top Articles on Decision Making

The Best Decision Making Books

We compiled a list of 39 of the most helpful books on decision making. Here are some of my go-to recommendations:

All Articles on Decision Making

Here’s the big list of every article we’ve written on decision making.


1 paraphrased from my friend Peter Kaufmann.
2 See the work of Adam Robinson.

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