Premortem for decision-making - Better than waiting for the decision postmortem

All investors and traders want to get better as decision-makers. They are open to learning and improvement, and one natural way to improve is to review their actions after the fact. The old adage is that we will learn from our mistakes. With a thorough review process, you can create an effective feedback loop to ensure future decisions aren’t driven by past mistakes.

For a larger money management firm, if something goes wrong, everyone will be called into a room to try, and assess what could have been done better. The investment committee will review the decisions to get it right next time by incorporating what was learned into future decisions. Make the trade, review it, and learn. 

What if we got the order of learning wrong? Gary Klein, an influential figure in natural decision-making, suggests an opposite approach. Focus on a premortem. Researchers have found that prospective hindsight is an effective tool for improving the decision process. Imagine a negative event has occurred, then trace back to its root cause. Before acting on the decision, review what could go wrong. Walk through all possible failure scenarios. Identifying what could go wrong will stop bad decisions from happening. There is no need to have a postmortem if the bad decision was never made. Review. Learn. Do the trade.

If a trader wants to take a long bond position, the premortem approach would have the trader assume the position went against him and then walk through with his peers all the reasons the strategy went wrong. Did inflation move higher? Did economic growth increase?  Did bond volatility increase? By looking at the reasons for failure, the trader may rethink his actions. 

Klein has also suggested a promortem. Assume that the strategy was put into place and everything went well. The decision-maker can walk through the set of events that made it work. This should be a natural part of the decision process for any trader and a good exercise for building the narrative of why an investment could go well, with some details. A decision walkthrough can reduce the need to review future failures.