😕 What is Decision Fatigue?

Decision fatigue is a phenomenon that affects each and every one of us. Every day, we are faced with thousands of decisions, from what to wear to what to eat, which route to take, and so on. These decisions accumulate and by the end of the day, we feel mentally drained. This not only hampers our ability to make good decisions, but also makes it difficult to make any decision at all.

When we add decision fatigue to the overwhelming number of choices available to us, it becomes a recipe for disaster. The investment world offers numerous options, which can be overwhelming when it comes to making investment decisions from over 65,000 choices.

Making fewer decisions can lead to higher quality outcomes.

In the field of decision making and psychology, decision fatigue refers to the declining quality of decisions made after a long period of decision making. It is now recognized as one of the causes of making irrational trade-offs in decision making. Decision fatigue can also lead consumers and investors to make poor choices in their purchases or investments.

🤔 My day packed with decisions.

I often find myself struggling with having too many options and feeling worn out from making too many decisions. Let me walk you through a recent day I had.

I started the day by going to the gym. Exercising helps me focus and makes it easier for me to make decisions. But when I walk into the gym, I’m overwhelmed by the amount of equipment there. I believe in keeping things simple, so I choose to ignore most of it and focus on the essentials.

After my workout, I handle some work calls and make several business decisions, as well as consider various companies. Then my wife calls to ask about dinner plans. Do we cook at home or go out? Another decision. When I get to the office, more decisions await me. I feel thirsty, and although there are many drink options available, I find myself having to decide what to drink.

In the evening, we decide to dine out. We settle on a Vietnamese restaurant. Feeling tired and mentally drained from all the decision-making throughout the day, I struggle to navigate through the extensive menu with countless choices. My mind is foggy, and I end up ordering the same thing I always do. If I were in a more refreshed state earlier in the day, I might have been more inclined to try something different.

The challenge of dealing with numerous choices and decision fatigue is something that many investors face today.

Less is more so reduce the amount of Choices.

“Less is more” can also apply to investing. A well-defined strategy, a guiding philosophy, and a rigorous process can help narrow down the vast investment options to the best choices that align with your investment goals.

Identifying areas of competence, guided by specific investment criteria, is not just about selecting stocks; it’s about minimising the number of decisions you need to make. By eliminating options that don’t meet your criteria and focusing on a smaller pool, you can make better overall decisions.

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The more choices we are forced to make, the more the quality of our decisions deteriorates.

Greg McKeown

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Instead of expending energy sifting through thousands of stocks and making decisions on unsuitable ideas, focusing on a smaller selection allows for more effective decision-making.

Having fewer choices leads to better decisions. Spreading your time among numerous companies and making decisions on companies that shouldn’t even be in consideration makes it difficult to make rational decisions on the ideas that truly deserve it.

To achieve this, refining the selection process is crucial. It directs your efforts towards areas that require the most thoughtful decision-making.

How Decision Fatigue impacts you?

Making too many decisions and having an abundance of choices can impair our ability to make better decisions and control our behavior. This is due to the cumulative effect of repeated decisions and an overwhelming number of options.

• The more decisions a person makes, the more mentally and emotionally exhausted they become.

• Uncertainty and limited information can lead to increased decision fatigue, as individuals struggle to make choices without clear guidelines.

• People with high standards and perfectionist tendencies may experience decision fatigue due to the constant pressure to make flawless choices.

• Chronic stress and anxiety can worsen decision fatigue by impairing cognitive abilities and increasing emotional exhaustion.

• The constant need to process and evaluate information can lead to cognitive overload, contributing to decision fatigue.

All of these factors can lead investors suffering from decision fatigue to face certain consequences, including procrastination, impulsiveness, avoidance of decisions altogether, rushed or irrational decisions, and, worst of all, defaulting to “safe” options.

When faced with too much choice and the effects of making too many decisions, it can affect problem-solving skills and lead to high stress and anxiety.

Overcoming “Analysis Paralysis”

When it comes to investing, the decision-making process should be less emotional than choosing something to eat from a menu. There is money on the line, not just some hunger.

The challenge is the combination of our waning decision-making capabilities as we make more decisions, along with the abundance of options and choices to select from. It’s this double-edged sword that creates decision paralysis.

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Decision fatigue typically involves a tendency to revert to the ‘default’ option, namely whatever choice involves relatively little mental effort.

Tobias Baer and Simone Schnall

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Rule-based decision-making with a methodical process is the most helpful way I’ve been able to overcome a lot of decision fatigue. Narrowing down a watchlist and then delving deeper into these shortlisted companies saves me a lot of time.

The idea of a checklist, as we’ve discussed before, can further help in efficiently narrowing down ideas based on a set of criteria. The criteria will be based around your strategy.

Decision fatigue will always be there. Why? Because we are always going to face decisions in life. You can’t avoid them. All you can do is design a way that eliminates unnecessary decisions.

Prioritise what you are doing and then simplify the overall process. Use decision-making frameworks that can support decisions and reduce uncertainty.

I face analysis paralysis at times.

I just get caught in this place where I have a lot of companies on my watchlist, there are a lot of good ideas that each require due diligence. That decision fatigue and too many choices create paralysis. To break it, I step away, go back to what I set out to do, where is there a gap in my portfolio, what is the most compelling of the ideas, and then come back with laser focus and start again.

I am a huge believer in having a philosophy and a strategy. It’s the guiding North Star that can help reroute your actions when there are too many choices available. When we are struggling to make decisions, ask yourself…

What have I set out to do?

What will help me achieve that outcome?

I try to control my environment as much as possible. I systemise recurring decisions to conserve energy. For example, I follow a set training schedule and eat the same healthy breakfast every day. I also wear similar clothes to streamline decision-making.

In my investing, I focus on small-caps, specific regions, industries, and fundamentals. This narrows down my choices and helps me avoid making unnecessary decisions about companies I’m not interested in. I further simplify by creating simple yes or no scenarios to shortlist potential investments.

I have my own way of valuing a business to determine an entry price. Once a company passes my process, I set a price and wait. This decision framework is based on an “If this, then that” scenario.

Indecisiveness in investing is equally exhausting…

Waking up without a clear strategy and decision-making framework in the investment world is chaotic. It’s important to have a plan in place to avoid the overwhelming question of “What should I do?” Answering this question every day can be truly draining.

It’s crucial to know what should be done and then go out and execute on it.

For those new to investing, the overwhelming number of options can lead to decision fatigue and the paradox of choice. Even a simple investment like dollar-cost averaging into an ETF, such as the S&P 500, has become more complex. Which fund should you choose? Should it be hedged or unhedged? What are the fees?

This multitude of choices emphasizes the importance of having a clear plan and sticking to it. Many financial experts suggest that investors who want exposure to the markets without picking individual stocks should automate their investments as much as possible.

For instance, if you decide a passive investment strategy is right for you, do the initial research and shortlist the best ETFs or funds you would like to own. Once you’ve made this initial decision, create an automated strategy, like dollar-cost averaging. Choose the amount and schedule, then automate it.

Eliminating repetitive decisions altogether can help staying the course with long-term strategies.

🔑 The Key Takeaway.

In investing, the mental exhaustion from decision fatigue can result in poor portfolio management, reduced returns, and increased stress. Here are key takeaways and strategies I think can help to overcome decision fatigue in investing:

Automate routine decisions: Set up automatic investing habits such as dollar costing or rule-based buy and sell orders. Even creating a schedule of hunting days, research days, portfolio evaluation days works for me.

Investment Process: Have a process guided by a checklist, filtering the best ideas, narrowing down your watchlist to streamline decisions.

Simplify investment options: Reduce the number of accounts and investment products to manage, focusing on a core/satellite portfolio with a few, well-chosen core and then expand out.

Use systematic investment strategies: Implement rules-based investment approaches, such as dollar-cost averaging or value/growth investing, to minimise the need for frequent decisions.

Track progress: Regularly review your portfolio’s performance and progress toward your goals, rather than constantly monitoring market fluctuations.

Focus on the big picture: Prioritise long-term goals over short-term market noise, and avoid overreacting to market volatility.

Avoid overthinking: Recognise that overanalysing investments can lead to decision fatigue. Instead, establish a framework for decision-making and stick to it.

Take breaks: Acknowledge that decision fatigue is a natural phenomenon and take time away from investing to gain clarity.

By acknowledging the impact of decision fatigue in investing and implementing strategies to mitigate its effects, investors can reduce stress, improve portfolio performance, and achieve their long-term financial goals.