You can spend a lifetime searching for some 'secret formula' to good decision making. Or you can learn three simple steps: Seek positive outcomes, avoid negative outcomes, and adjust your decisions based on new information.

Rather than making you read this entire article for the secret recipe to making good decisions, I’ll just give you the quick answer right up front.  Making good decisions basically comes down to three things:

• Do the things that increase the chances of a good outcome
• Avoid the things that increase the chances of a negative outcome
• Adjust your decisions based upon new information.

That’s it in a nutshell.  Follow those three rules and you will make good decisions.  Of course, the details are a bit more complicated than that, but in the end, that’s all you really need to know. 

If the above is enough for you, then there is no reason to read further.  However, if you’re not convinced or would like additional details, please continue.

Let’s take each rule one at a time.

Rule #1 – Do the things that increase the chances of a good outcome

You can think of this as the lottery rule.  “If you want to win the lottery, you must buy a ticket.” This sounds straight forward enough.  But life is rarely that simple.  The lottery is, in fact, a bad decision because the price of the ticket is about twice the expected value of your earnings.  But it does illustrate the point.  Let’s take Cal Ripken Jr. as an example.  Cal ended up beating all the odds and broke the record for most consecutive baseball games played.  When you think of all the things that could have happened to him to cause him to fail at his attempt, it is remarkable that he achieved it.  So how did he do it?  He did all the things he could to give himself the best chance of beating the record.

He exercised on a regular basis to stay healthy and improve his strength.  He practiced his craft to increase his odds of being selected for each year’s team.  He arrived to work early to make sure he had plenty of time to overcome obstacles.  In short, he did what he could to increase his odds of being successful.
Let’s say your goal is to live a long life.  If that is the case, what are the things you can do to improve your odds?  You could start by wearing your seatbelt when you ride in a car.  Then you could eat a balanced diet filled with fruits and vegetables.  Exercise on a regular basis to strengthen your heart and lungs and get regular checkups to spot any early illnesses.

In my own business, we run a website to sell our products.  We constantly look to improve our chances of success by hiring the best people we can find, treating our customers better than we would treat ourselves and offering the best selection of products we can find.  This is no guarantee that that we will succeed, but it does improve our chances.

Rule #2 – Avoid the things that increase the chances of a negative outcome

This rule can get a bit complicated because human beings are terrible at assessing risk.  We tend to overestimate the dangers of rare catastrophic events and underestimate the dangers of more probable outcomes.

For example, the odds of being killed by terrorism are extremely small.  In the last 10 years, there have only been about 2,500 people killed by terrorists; yet, that is where much of our government funding goes to.  Americans are simply unable to accurately gauge the risks associated with catastrophic events.  In the same 10 year period, about 650,000 people were killed in automobile accidents.  Yet, the media never talks about this.  In fact, the headlines would be pretty boring if the news was all about who died in an automobile accident yesterday.  But when you look at it, you are far more likely to be killed in an automobile accident than to encounter terrorism.  We simply can’t assess the risk properly.

Let’s take smoking as an example.  A little less than 40% of our population smokes.  If you smoke, the risk of dying of lung cancer is about 1 in 6.  Those are very high odds for a life threatening risk.  It’s the same risk as playing Russian roulette one time.  Yet, most smokers don’t worry about it.  Although, they would never play Russian roulette, they are unable to properly gauge the risk of smoking on them and they underestimate it.
Let’s once again look at our goal of living a long life.  If that is your goal then you’ll want to avoid the things that increase the chances of dying early.  Therefore, you’ll want to avoid engaging in risky behaviors.  You’ll want to avoid riding a motorcycle; eating too much; eating too much meat; smoking; working in a coal mine or other risky behaviors.

In my company we avoid the things that can increase the odds of a negative outcome.  We don’t say no to our customers.  We don’t let our site go down.  We avoid putting our assets or reputation at risk.  We avoid making changes to our website without testing them.
What are some of the things you should avoid in order to reduce your chances of a negative outcome?

Rule #3 – Adjust your decisions based upon new information.

Adjusting your decisions based upon new information is based upon Bayes’ theorem.  Bayes’ theorem shows us how to update our decisions based upon new evidence.  This is the part most people are not very good at. 
For example, let’s say you wanted to pick a chocolate chip cookie out of two jars.  One jar has 90% chocolate chip cookies and 10% plain and the other has 90% plain and 10% chocolate chip. 

Assuming you initially draw out a plain cookie from jar A, what should you do?  The answer is simple.  On your next draw, you should choose jar B.  Why? Because if you drew out a plain cookie, you most likely drew it out of the jar with the most plain cookies and therefore, the other jar will give you better odds of picking the chocolate chip cookie next time.

Unfortunately, human beings are terrible at this.  This includes doctors who are later given additional evidence about a patient and stock brokers who are later given more evidence about a company.  They both tend to stick by their initial decisions (bad idea).

A couple of years ago, my wife and I wanted to get into the rising real estate market so we put $40,000 down on a new townhouse.  A few months later, we began to get indications that the market had turned south.  I put an ad in the paper to try and gauge the market for real estate.  In the ad, I indicated “must sell - buyer motivated.”  I received not one call.  This told me that the market had changed and I should adjust my decision.  My wife and I walked away from $40,000 but we made a good decision.  Two years later, the market is still down and the property would not have been worth what we paid for it.

A similar situation occurred in our business.  Right after hurricane Wilma, it seemed as if the world needed a lot of generators.  So we added a lot of generators to our website and began selling them.  Shortly thereafter, we ran into problems with city permits, electricians, delivery, architects and vendors.  This new information suggested that we had underestimated the risks and costs of the generator market.  We made the decision to abandon the market despite having good sales.  Again, this was a good decision.

Back to your goal of living a long life – what kinds of information would cause you to change directions?  We have new information today about environmental hazards such as lead and asbestos.  We also know that trans-fats and cholesterol are harmful.  Given the new information, the prudent thing to do is to change your lifestyle to avoid the potential problems.

So there you have it.  Those are the three rules for good decision making.  It is important to point out that making good decisions does not guarantee a positive outcome.  A good decision could lead to a negative outcome and a bad decision could lead to a positive outcome.  However, if you play the odds correctly, you are far more likely to succeed in your goals.