The economist Mohamed El-Erian, in his book The Only Game in Town, writes about the importance of having and revisiting frameworks to support clear thinking. He tells a story from the 1980s when the International Monetary Fund (IMF), for whom he worked at the time, wanted to better understand financial markets. The IMF sent El-Erian to New York to talk with asset managers, where he asked them “What was the first thing you did when you heard Mexico wouldn’t be able to meet its debt repayments?” in 1982. El-Erian recounts a portion of one of his informational interviews:

“I sold Chile.”

 

To an economist, this made no sense. Chile was a well-managed economy; it never had to restructure…the economist in me thought, “Wow, this is a difficult, irrational market participant.”

 

But he explained, “Look, I manage Latin American funds, I believed, and it turned out to be the case, that some of my investors, when they read about Mexico, would take their money out of the fund. I didn’t want to be left with an over-concentrated position so I got ahead of that trend by selling Chile and some other winners.”

 

And I remember being amazed that there was this whole other dimension out there that goes beyond economics and policy, and it goes back to the idea that how you think about things is very important.

This story, and the idea that “how you think can be as important as what you think”, resonated with my experience with timberland investors, who have reasons beyond traditional economic fundamentals to add forests to their portfolios. This is also true of how a family might choose a school for their child or what kind of car to buy. It also provides another way to think about decisions we make with incomplete information.

We humans suffer from a range of limitations that affect our ability to make decisions that are independent of the quality of the information we receive. We misinterpret history, fail to provide context, and neglect our own biases. Frameworks and models help account for our cognitive “issues” and provide structure for both day-to-day thinking and mission-critical issues. However, we want to remember that models and frameworks serve us in our learning and understanding, we don’t serve the models.

Have frameworks to manage bias and set aside emotions to the side. Accept that every decision involves tradeoffs. Remain self-aware on your ability to make the call. At times, we must acknowledge that we lack the knowledge and training, and benefit by consulting an expert. As Charlie Munger says, “you’ve got to know what you know and what you don’t know. What could possibly be more useful in life than that?”