Tuesday, February 21, 2012

Ideas and Business Part II: The validity of the mind to make decisions and the character to take personal responsibility

Too often we see people struggle to make decisions or give a straight answer. We see these same people hedge whatever decisions they make so that they won’t be held accountable if anything goes wrong. We read about how some business executives destroy billions in shareholder value because they refused to face the facts of reality and take responsibility for their mistakes. We hear about how people lost their shirts because they blindly followed the herd and didn’t think for themselves.   

These types of destructive behavior are inconsistent with living a productive life and creating wealth. To create wealth, one needs to be able to use his mind to think and comprehend reality. After understanding reality, one needs to arrive at a decision based on principles and his own independent judgment of what’s good for him. After making a decision, one needs to implement his decision through action while at the same time observing reality to see if things are going according to plan. If the facts indicate that his decision was a wrong one, then he should take responsibility and try to correct the mistake.

In the second part of this 3 part series(you can check out part I here), I will be talking about the validity of the mind to understand the facts of reality and make good decisions. I will also be talking about how the truth should never be avoided and how you should always take personal responsibility for your decisions. Here’s the article:

There are absolutes in reality and we are capable of knowing these absolutes

One of the reasons why people try really hard to avoid making a decision is due to the belief that there are no absolutes. Many times in university I was taught that there is no wrong answer, and that anything can work but stating with certainty that something works should be avoided because nothing is certain and we need to be flexible and change our positions to whatever is in trend at the moment. How can you ever trust your mind to understand reality and come to a correct decision if you hold such an impotent position?

There are absolutes in reality, and this truth will not change regardless of how many times someone tells himself otherwise. An investor’s long-term returns from a stock will only be as good as the return on equity generated by the businesses underlying the stock, a business can only be successful in a free market if it creates value for its customers, stealing from the private sector to provide a stimulus package does not create economic prosperity but destroys it. These things are absolutes and people who ignore them do so at their own peril.

To be successful in business, investing, or any productive activity, we have to understand that there are absolutes and that we are capable of looking at the evidence and finding out with certainty what the current problems are, what are the consequences of a specific course of action, what the correct decision is, and etc. We have to avoid the fool’s or coward’s way out of making a decision and taking responsibility for it by claiming that lots of things can work without naming a specific solution, and at the same time claiming that we can be certain about nothing (in other words, they’re saying that they don’t want to make a decision and that they can’t be held accountable if they did make a decision).

Make decisions based on principles

Indecisiveness and terrible decision making can be a result of not making decisions based on principles (When I talk about principles, I mean the principles that are consistent with reality and not irrational principles like “self-sacrifice” and the “public good”). A chemist can’t make decisions that are in violation of the principles of chemistry; an investor has to make decisions that are consistent with the principles of investing. Once you understand the principles of a certain field, you will find it easier to make decisions related to that field and you will be better equipped to avoid making really bad decisions. Abandoning or compromising on principles can only lead to disastrous results.  

Make independent Judgments

There are people that avoid the effort to think and make decisions because they believe, at least subconsciously, that their minds are impotent and they’re incapable of coming to a right decision (or they’re just plain lazy). These people will either let the herd decide for them or just imitate someone else without knowing how that person came to such a decision. This way, these people can shift the blame if things don’t turn out well (shifting the blame, however, won’t erase their losses). The subprime mortgage crisis is something a lot of bankers could have steered clear of if only they did not replace independent rational thinking with the blind instinct of the herd.

In business and in life, blindly copying some group or someone can lead to huge losses. And even if you do manage to profit by leeching off the effort of someone else’s mind, can you really take pride in those profits. There’s nothing wrong with looking to others for advice, but take responsibility for your life and act on your own independent judgment and not on the opinions of others. Have some self-esteem and acknowledge the validity of your mind to think and come to correct conclusions.    

Facing the facts of reality and taking personal responsibility

A lot of wealth was destroyed because some business people refused to face the facts of reality. If the executives that made a bad acquisition didn’t simply blank out whenever the topic came up (hoping that the acquired company won’t be bad if they just didn’t say it was bad), but instead tried to sell off, restructure or wind down the acquired company, then that acquisition wouldn’t be continuously sucking up resources and destroying shareholder value. If Greek bond investors just looked at the evidence staring them in the face, they would have dumped those bonds a long time ago and wouldn’t have to “voluntarily” take a huge haircut. These are problems that can be avoided, or at least mitigated, if the people in charge didn’t evade reality but made decisions to turn things around instead.

While it’s ok to make mistakes, it is definitely wrong to avoid taking responsibility for our mistakes. Just because the decision was made by me doesn’t mean that it’s special and detached from reality, the decision will not work out well if the facts indicate that the decision was a wrong one. When we realize that we made a mistake, we can either avoid naming the truth and deny that we made a mistake (this will lead to much more disastrous results in the long-term) or we can take responsibility by admitting that we made a mistake and take action to correct our mistakes.      

Conclusion

We need to believe that our minds are potent and that we are capable of comprehending reality. We need to understand that we have to make principled decisions based on our own independent judgment and take personal responsibility for those decisions. These things are true whether we’re running a business, evaluating an investment opportunity, or doing any other activity to achieve our values. You can evade the effort to understand reality and make principled decisions, but you cannot change the fact that this virtue is needed to achieve your goals and be successful.

If you have any questions or have anything that you would like to add, please feel free to comment or send me a private message. Thank you for reading, and may you always sustain good returns on your portfolio. Take care.