One of my particular interests in investing is how to make better decisions. I’ve written before about biases and problems we face, and much of the current research is in fields such as behavioral finance, with a focus on how to avoid mistakes that seem to be hardwired into our brains.
Implicit in that kind of research, though, is the presumption that, for things we do understand, we get it right; with simple things, we can focus, pay attention, and not let stuff slip through the cracks.
If you think about it, this is a patently false assumption. Plenty of things—critical, obvious things—do drop through the cracks, perhaps not all the time but certainly far too often.
A better way to avoid errors
Getting the simple things right is the focus of The Checklist Manifesto, by Atul Gawande, a Boston surgeon and author. As a group, surgeons are both highly educated and extremely self-confident (traits not unknown in the investment profession), and they’re tasked with managing complex processes, involving many people and rapidly changing conditions, with potentially fatal consequences for failure. Gawande has a longstanding interest in understanding how medicine can be practiced better and a gift for describing that quest in writing.
The book details Gawande’s own work to develop checklists as a way to minimize surgical mistakes around the world. His investigations take him into some surprising areas—aviation, skyscraper construction, and, yes, even investing—to explore how other professions have attempted to maximize decision-making performance under stress.
The conclusion of the book can be summed up in two words: checklists work. But Gawande’s experiences and the comparisons he makes provide valuable context. The book offers a conceptual framework for why checklists work, as well as a host of examples of how readers can apply them in their own lives.
Nailing down the simple to focus on the complex
I'm a big fan of rule-based decision systems, but I haven’t paid enough attention to checklists. The book makes a very powerful case for using checklists as a tool for understanding the key elements of a process and minimizing stupid mistakes and omissions.
Going back to behavioral science, we know that we only have so much attention and will power, and that using it on trivial items can make later, more important decisions harder or impossible to get right. You can think of a checklist as a way to stop worrying about certain items, so you can focus on more complex elements later on—including in the event of a crisis.