From Annie Duke’s book “How to Decide”
Create a precommitment contract.
- Precommitment Contract (also known as Ulysses contract)- “An agreement that commits you in advance to take or refrain from certain actions, or raising or lowering barriers to those actions.
Such agreements can be with others (for group decisions or to create accountability to another person) or with yourself.”(p. 199) - “Like Ulysses, you can physically prevent yourself from making poor decisions.” (p. 199)
- “You can raise barriers, making it harder to execute on actions that will defeat your goals. When you raise barriers, you’re not physically preventing yourself from acting, like when you tether yourself to a mast. But you are increasing friction to make it more difficult to tamper with your plans. Raised barriers also provide you with a moment to stop and think before acting.” (p. 199)
- “You can lower barriers, reducing the friction to execute on actions that advance you toward success.” (p. 199)
Examples of precommitment contracts.
- “Ulysses contracts that raise barriers can range from putting a lock on the refrigerator and keeping the key in a time-release safe to simply declaring your intentions to a friend. The lock physically keeps you from getting into the refrigerator.” (p. 200)
- “Telling a friend about your intentions makes you accountable to another person, a barrier that compels you to stay true to your word.” (p. 200)
- “You avoid driving under the influence by using a ride-sharing service when going out on New Year’s Eve, which physically prevents you from getting behind the wheel at the end of the night.” (p. 200)
- “You want to get to work on time so you keep your alarm across the room, which raises a barrier to hitting the snooze button and falling back to sleep.” (p. 200)
- “You decide to eat healthier and you know that late-night snacking is where you’ll go wrong. You can throw out all the junk food in your house. You can also stock your house with healthy food or pack a lunch to bring to work with you. That reduces friction and makes it easier to stick to good choices.” (p. 200)
- “Your goal is to save for retirement and you’ve identified that impulse purchases cause you to overspend.You can set up automatic transfers from your paycheck into a retirement account. That makes it harder for you to bust your budget.” (p. 200)
- “Like other precommitments, you can set advance criteria for how you’ll react. If you think you could fall for the sunk cost fallacy, refusing to quit when quitting is the appropriate response, come up in advance with the conditions under which you would quit. Write those down and commit to changing course when those conditions arise. That’s particularly effective in a team setting.” (p. 208)
- “For example, if you’ve identified that you make bad decisions following sudden drops in the stock market, get someone else to execute trades for you in order to prevent making impulsive trades yourself.” (p. 208)
Beware of tilt
- Tilt- “Right after a bad outcome, especially one due to something outside your control, you can become emotionally compromised. The emotional centers of your brain get aroused, increasing the likelihood that you’ll make poor decisions. When activated, the emotional parts of your brain inhibit the parts of your brain responsible for rational thinking. Shutting down those parts of your brain compromises the quality of any decision you make in that state. This hot emotional state is called tilt. When on tilt, you’re more likely to make decisions that make a bad situation worse.” (p. 206)
Examples of tilt:
- “You create a diversified portfolio for your investments. The stock market drops 5% in a month, so you reallocate your money out of cash and bonds and into stocks in order to buy the dip. Within a week the market drops another 5%, causing you to panic and sell all your stocks immediately.” (p. 206)
- “Or let’s say things aren’t going your way on some project in which you’ve already invested a bunch of resources. You’re unlikely to quit in those situations, even when an objective observer would see that quitting is appropriate. In the wake of a bad outcome, it’s difficult to see the situation rationally. If you could get to the outside view you would quit, but you don’t because you’re stuck in the inside view. That’s the sunk cost fallacy, another example of tilt.” (p. 206)
- “As an example, let’s say you commit to making healthy eating choices. A week later, you eat a couple of donuts in the breakroom. A lot of people respond to that bad decision by saying, “Yeah, I guess today is shot.” Then they load up on junk food, thinking they’ll start again the next day . . . or next week” (p. 206)
Use precommitment contracts to lessen tilt.
- “When you consider how you might respond to negative outcomes in advance of those things happening, you’re likely to think more rationally. It’s easier to come up with the appropriate course of action to take when things don’t go your way before those things go wrong than it is after they go wrong.” (p. 207)
- “Identifying how things can go wrong helps reduce tilt in three ways:
“First, identifying bad outcomes in advance can reduce the emotional impact those outcomes will have on your decision-making when they do occur. It changes your frame from “I can’t believe this happened to me” to “This happened but I knew it was a possibility.” (p. 207) - “Second, you can learn to recognize the signs that you’re on tilt so you can identify and address it more quickly. This involves taking a tilt inventory of conditions you recognize from past instances when you’ve been emotionally impaired: Is your face flushed? Do you have trouble keeping your thoughts straight? Do you engage in self-talk about how bad things always happen to you or (like hindsight bias) you should have seen it coming? Do you take things personally, or become confrontational, or use particular language, or engage in some other thought patterns when you’re being guided by emotion?”
- Third, you can precommit to certain actions that you’ll take (or refrain from taking) in the wake of bad outcomes. This is tantamount to tying your hands to the mast to prevent emotional decisions. For example, if you’ve identified that you make bad decisions following sudden drops in the stock market, get someone else to execute trades for you in order to prevent making impulsive trades yourself.
- “Or you might plan how you’ll deal with the what-the-hell effect. If you’re committing to eat healthier, it’s easy to recognize that you won’t always make perfect decisions. When you imagine faltering and succumbing to the breakroom donut, you can commit in advance that you won’t let one bad decision derail or postpone your goal. This works especially well if you create accountability by declaring your intentions to other people.” (p. 208)