How to evaluate investment decisions?

Evaluating investment decisions involves several key elements as discussed by experts in the field:

1. Objective Performance Assessment:

   • Keep a log of gains and losses to counteract biases introduced by pride and regret. This helps maintain an objective record of your performance, rather than relying on memory, which may distort facts 1.

2. Structured Options Evaluation:

   • Treat investment options like job candidates by evaluating different aspects systematically before invoking intuition. This helps accumulate information objectively, reducing biases 2.

3. Combination of Intuition and Analysis:

   • Balance intuitive and analytical approaches. Emotional insights can be crucial, but should be backed by thorough analysis. This dual approach helps manage complex decisions, such as mergers or startup investments 3 4.

     Evaluating Investment Decisions

     Barry Ritholtz

     Meir Statman

     Objective assessment of financial decisions is crucial for investors. Keeping a log of gains and losses helps combat biases like pride and regret. Relying on diversification and avoiding conclusions drawn from small samples can lead to better outcomes, while emotional motivations may cloud judgment and lead to suboptimal choices.

     

     Masters in Business

     At the Money: What Investors Really Want

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4. Documentation and Consistency:

   • Document your decision-making process meticulously to ensure intellectual honesty and internal consistency. This practice combats the tendency to retrospectively alter the perceived rationale behind your decisions 5.

5. Diversification and Avoiding Small Sample Bias:

   • Utilize diversification to manage risk and avoid drawing conclusions from small samples. This scientific approach to investing helps in making more informed decisions 1.

6. Scenario Analysis and Cognitive Interviews:

   • Evaluate decision-making by running scenarios and conducting cognitive interviews to understand the underlying thought processes and rationale for decisions 4.

7. Emotional and Analytical Balance:

   • Recognize the importance of passion and emotional engagement alongside analytical rigor in early-stage investments. Emotional commitment can often drive long-term success 3.

8. Timing and Strategic Back Testing:

   • Optimize return streams and mitigate risks by considering the timing of investments, brainstorming indicators, back-testing strategies, and adjusting based on performance data 6.

By integrating these practices, investors can develop a robust framework for making well-rounded and informed investment decisions.