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“Can you just make the decision for me?”
Decision making can be a real source of stress, especially when it comes to your finances. That’s why we went the extra mile with this episode, compiling some of our favorite conversation excerpts and takeaways into a full-on blog post –with links to supporting content and resources.
Enjoy the decision-making rabbithole!
How to Make Decisions with More Confidence (and Less Stress): A Conversation with Michelle Florendo
As an adult, it seems like life is a never-ending stream of choices.
From little decisions like what’s for dinner to big decisions about your career or financial investments, the choices keep coming–and there rarely seems to be a “right” answer.
I’m in regular conversation with clients about their financial choices and planning for life transitions. (Do I sell my company shares now or later? How much should I save for retirement? Can I afford to take this vacation or send my kid to that college?) So when I had the chance to interview a decision engineer for the podcast, I had to say yes.
I couldn’t wait to get Michelle Florendo’s insights, because as a Stanford-trained decision engineer, she’s made it her life’s work to teach people how to make decisions with less stress and more clarity.
In this conversation, we go beyond the process-driven elements of engineering to talk about how our feelings and emotions influence our decisions, especially the ones that impact our finances.
I know I learned some things that are going to help me become a better financial advisor – and that’s something I don’t say lightly! I often find myself talking clients through options that might feel counterintuitive, and the process Michelle shared is going to be a huge support in helping them navigate uncertainty.
Michelle has frameworks that apply to every decision—personal or professional, big or small–and we talked through some money-related examples that really bring the concepts to life, from investing and IPOs to daily spending habits.
If you’ve ever struggled with making a decision, planning for the unknown, or articulating what you value most, this is a conversation you do not want to miss.
In Both Financial Planning and Decision Making, You Have to Know What Matters to You. (3:50)
What do finance, engineering, and decision making have in common?
Michelle shares that she’s a Stanford-trained decision engineer, who specialized in finance and decision engineering. Which naturally spurred the question: How do finance, engineering, and decision making go together?
In her words, finance has a lot to do with understanding the value of things, and we’re doing the same kind of evaluation when we’re thinking about decisions–or in Michelle’s case, engineering decisions.
We have to ask ourselves: What is the value that we are trying to optimize, and what is the attached value when it comes to the different options we are evaluating?
To simplify: Whether we’re trying to make a decision or considering our finances, it’s always thinking about what matters.
In finance, the metric of value is very clear: dollars. (Though in many cases, there’s more to it than that.) In decision engineering, it may be a number of things from dollars to resources to values; the objective depends on what matters most for the decision maker.
The Role of Feelings in Decision Making (5:00)
In a decision-making model, how do you account for the idea that sometimes people are irrational?
Decision making is all about values, and when Michelle thinks about emotions in decision making, she considers emotions to be indicators. Whether it’s excitement about something or fear of something, emotions point to some sort of need.
As decision makers, when we can articulate what those needs are, we can understand how they–and the feelings that come with them–fold back into our decision processes.
This is all about working with the slow-thinking part of your brain, and pairing it with the fast-thinking part to understand where the major places of tension are. (Hearing Michelle talk about this is fascinating to someone like me, Hilary, who most often acts by my fast-thinking brain.)
When you slow down to identify those emotional points, you can focus on them–and see the pieces of the puzzle that aren’t actually that important to you.
Michelle recommends taking the thoughts and feelings that come up around a decision out of your head and externalizing them on paper, to allow you to more easily examine them and notice the nuances.
And, most importantly: Don’t demonize emotions in the decision-making process–they’re here to help!
– Michelle Florendo
The Three Components of Every Decision (5:55)
Every single decision we make (whether it’s big, small, personal, group, work, or life) has three components:
- Objectives: What matters to you in the outcome?
- Options: What are the things that we’re choosing among?
- Information: What do we know about how each of those options will help us attain those objectives that we have?
I asked Michelle to bring these components to life with an example, so she shared a story about a recent call she had with a client who is a leader in a corporate organization, had been headhunted for a job, and was deciding whether or not to accept an offer.
The options she had were pretty clear: Do I stay or do I go?
When it really came down to making the decision, Michelle and her client had to talk about her objectives–namely, what mattered to her in the outcome:
What was attractive about this external offer? What concerns or worries did she have about it? What was attractive about staying in her current position? What worries or concerns did she have about that? What themes came up around the key criteria that mattered most to her, and would therefore drive her decision?
When asking herself, “What should I do? How do I make this decision?” she had to be very clear about her objectives, AKA what matters to her.
For example, compensation is often a part of career conversations, and one of her objectives was to continue meeting the financial goals of her family. On another hand, it was also really important that the new job was a good culture fit for her.
Next, they started to examine the information they knew–and didn’t know–about each option.
Salary was knowable; she knew what she made at her current job, and she knew what was being offered at the new job.
The cultural fit was a little different. She had a lot of information about the culture and team dynamics at her current job, but it was an unknown with the offer she received. That was an information gap–one that was unknowable, to a degree–so she was encouraged to do some more research in order to make a more informed decision.
Objectives, options, and information come up in every single decision we make. Once we know what those three components are, we can put them through decision-making frameworks.
Michelle says a lot of her work (and probably the most important part of the process!) is making the implicit explicit: Find a place that you can “download” and organize all the thoughts and variables of the upcoming decision so you can start tuning into the components and how you feel about them–and get more clear on what you actually want.
– Michelle Florendo
I could say more about these three components but Michelle is the expert here, so I’m going to point you in the direction of her work if you want to learn more: Download Michelle’s Decision Inventory Worksheet and you’ll get a simple (but very thorough) tool to help you find the clarity you’re looking for–plus a free, mini-masterclass in decision making!
It’s not a prerequisite for getting through the rest of this article, but if you want to up-level your decision making skills… 👆
How to Get Clarity About What You Really Want (6:39)
Defining your objectives means getting really clear on what’s important to you.
It can be incredibly difficult to make a decision when you don’t have certainty about how things will play out, but we often have to choose in the face of unknown, incomplete, or changing information.
One of the most important things about objectives is to know what it would look like to have your objective met, even if it’s not perfect–and conversely, what’s out of bounds, or something you’re unwilling to compromise on?
In the case of Michelle’s client, one of the unknown factors about the new job was the cultural fit or team dynamics, which were important considerations for her. So Michelle dug in: Could her client name what it would look like to meet her objective in that regard? Is that something where she could influence the outcome over time?
There are situations where the variable is unchangeable, like the location of corporate headquarters. But there are also situations we can change–and while the initial result might not be ideal…is it livable? Or is it out of bounds/a deal breaker?
Articulating what it looks like to have your objective met is not always straightforward.
For example, financial compensation is about the amount of money that goes into your bank account, but the actual value or impact may not be about a number. It might be about quality of life and being able to afford certain things or experiences.
This is where you have to dig in, define what your “enough” is, and where you’re drawing your lines in the sand.
– Michelle Florendo
Doing a Relief/Regret Analysis (a.k.a. Happy Face/Sad Face Decision Making) (16:57)
Can you lower the risk of regret after making a decision you can’t change?
Michelle’s background is in engineering, in part because of her passion for simplifying things–including the decision-making process.
Carrying through the same example of our corporate client deciding between two jobs, if Michelle is wearing her engineer hat, she and her client would map out a decision tree.
Most people don’t need to do that, though. In this case, her client had two options: take the offer, or don’t take the offer.
Within those options there was unknown information, like the cultural fit and team dynamics. When Michelle asked her client to get more explicit about what meeting her objective would look like (and what was out of bounds) they got into a conversation about the different if/then directions of each possible outcome.
This is when Michelle likes to do a Relief/Regret matrix, or what some of her students call the “happy face/sad face.” (See? Simple!)
Michelle might ask her client, “Okay, happy face: Let’s say you chose to take this offer. What does the future look like when you are so happy you chose this versus staying at your job?”
Her client might say, “Oh, the culture was a fit. It was great. Our stock takes off. We found product-market fit. We’re actually generating revenue,” blah, blah, blah. Great.
Next, they’d go to the sad face: “What would the future look like when you are regretting that you chose to take this offer?” And then they explore that outcome.
“Well, maybe I don’t get along with leadership. There’s a lot of strife, there’s a lot of sputtering. We aren’t actually taking off the way that we wanted to,” blah, blah, blah. Okay.
Then, she dives deeper into the sad face: “Now let’s say that regretful situation comes true and the bad thing happened. Now what? How would you respond? What is it that you would actually do in that moment?”
Her client said, “Well, I guess I would look for a different job.”
It would suck, but this is what I would do.
Then, Michelle brought her client back to the present moment–when the decision is being made and the bad thing hasn’t happened yet. Is there anything she could do to reduce the risk of the regretful situation happening? Can she do more research or come up with a mitigation plan? Are there other creative options?
What If You Have a Decision to Make and All the Options Suck? (21:48)
One of the biggest ways we can improve the options we’re choosing between in the decision-making process is to go beyond the obvious.
Can you learn to think more creatively about decisions, specifically the options component, while remaining in the realm of possibility?
This is the point in the decision-making process where Michelle suggests shifting from slow thinking back into fast thinking to get creative.
– Hilary Hendershott
That kind of creative thinking might come more naturally to some than others, but it is a learnable skill, even if it’s hard sometimes. Michelle knows this to be true because she had to learn how to do it for herself.
She was raised to choose the “best” option out of the ones that were presented to her, not to create her own opportunities. The fact that she runs her own business now is a big departure from her parents’ mode of thinking: Just go get a job.
Starting her own business was actually a function of Michelle’s training as a decision engineer. When it was time to start a family, it was important to her that she spent enough time with her children to be a critical part of their learning between the ages of 0 to 5. And, she wanted to work.
She didn’t like the options she had in the corporate or the nonprofit realms because they didn’t offer the time flexibility or location independence that she needed to meet her primary parenting objective.
Michelle decided to create her own career options, exploring possibilities that aligned with her values and goals, even though that wasn’t her pre-disposition…especially as a risk-averse person.
Her natural inclination is to think in “can’t because” terms and conditions, but when she’s able to switch to “can if”, it unlocks a whole world of options that didn’t exist before.
Give yourself the space to explore possibilities: What is possible IF…?
And then: “What would have to be true for me to make this happen?”
– Michelle Florendo
Yes, sometimes our options are straightforward, and we’re satisfied with what’s on the table. And, as Michelle points out, sometimes we have to get creative to feel more okay about the decision to be made.
Reframing from “can’t because” to “can if” was a huge lightbulb moment for me. Tune in around the 21-minute mark of the episode for Michelle’s great example of “can if” thinking… then practice it, for yourself.
7. Moving Through Decision Paralysis and Finding Satisfaction (19:34)
Analysis paralysis comes from chasing “more”, and decision satisfaction comes from knowing when enough is enough.
We work really hard with clients of Hendershott Wealth Management to help them make smart financial decisions–because we have witnessed many people with massive bank accounts and secure retirement savings who are deeply unsatisfied with their lives.
When enough money isn’t the answer to the question, you have to dig deeper and ask what matters.
– Michelle Florendo
One of the most common examples of this is when clients come into my office and ask, “My company is about to go through an IPO, and I’ll suddenly be a stockholder. How can I maximize my investment opportunity and post-IPO proceeds?”
As their financial advisor, I work with them to release the attachment to maximization from purely a dollars perspective–which almost certainly comes with a high amount of risk–and find their minimum level of satisfaction.
Let’s illustrate this with a hypothetical client. We’ll call her Cindy.
Cindy came to us at Hendershott Wealth Management with both pre-IPO stock and stock options that were granted by her employer. She asked us to devise a strategy that would help her maximize her proceeds from the IPO.
First, and most important to note: The only real way to maximize proceeds from an IPO is to be able to predict the future. And no one can do that.
But, in the case of an initial public offering, employees of companies tend to think “this is my one shot to make the big bucks!”, and let their emotions override logic. That’s where we come in as the voice of reason, and try to figure out their “enough,” so we can set up the strategy that will work best for them…
So, rather than trying to guess how to maximize profits, we coach clients to consider their own range of acceptable outcomes. For Cindy, she was very clear that if she didn’t come out of the IPO transactions with two million of after-tax profit, she would live with significant regret and disappointment.
So we strategized a way to “guarantee” two million of profit – basically, a time in the post-IPO process to do the casino equivalent of “taking money off the table” to pocket the stock proceeds needed to leave a minimum of two million in her investment accounts. Once she had accomplished this, the rest of her post-IPO trades could be made without the emotional significance they once had.
In other words, everything above and beyond the two million dollars was a “nice to have” rather than a “need to have.”
There’s an “enough”/“need to have” number for each person, and it’s our job to find it together.
If we can land on and accept that number ahead of time, our clients are more likely to be satisfied with the outcome. Whether they’ll be elated or not, I don’t know–but it will be enough.
It’s so important to find that answer because, as Michelle pointed out, a lot of achievers want to chase the more without really knowing the why–and that’s why it’s so important to be able to articulate your objectives.
Being clear on what matters to you, and why, helps you know what it looks like to actually meet your objectives and feel confident in the decisions that led you there.
Remember happy face/sad face -- AKA relief/regret? In this section of the episode, around the 19:34 timestamp, I share a scenario my clients face all of the time: An IPO is looming and they want to know how to maximize their post-IPO proceeds. Michelle and I dive into the perpetual question: What’s the “right” decision?
Risk Appetite and Financial Decision Making (26:05)
What it means to be a “downside minimizer” vs. “upside maximizer”, and trading hindsight bias for hindsight confidence.
When I was talking to Michelle, I wanted to run some of the most frequent financial questions and decisions we work through with our wealth management clients by her.
Because our firm is based in Silicon Valley, we work with a lot of people who have tech stock–including concentrated positions of their own company stock that might outpace their more diversified portfolio.
We worked through a hypothetical example of someone who had $5 to $10 million in company stock and only $1 million in their 401(k). That company stock could go to zero or it could grow to $50 million. Nobody can predict the future.
If that client were working with me, we would determine their risk tolerance: Are they willing to give up the chance at $50M while knowing that they could end up with nothing? What’s the in-between, if their risk appetite isn’t that large? Once they’re allowed to sell, would they be willing to replace half their stock options to create a more diversified portfolio?
They may be giving up that moonshot of $50 million with a portion of that stock, but the tradeoff is security; you’re turning the potential into tangible wealth that you can literally bank on.
I swear I have this conversation at least three times per week, so I took the question to Michelle to see if/how she’d apply a decision-making framework to it:
Our test scenario: Let’s say I work for Nvidia, which is currently one of the largest market caps on the planet at the time of this recording. I have $20 million of company stock, $1.5 million in 401(k)s, and my retirement goal is $5 million. How much of that concentrated stock should I take off the table and diversify?
Michelle’s first recommendation is to flesh out the objectives at play because when it comes to personal finances, the objective isn’t just about the dollar amount. The dollars are a means to what you can do with them, so it’s important to be clear about the ultimate goal.
She would also want a better understanding of the actual options my client and I discuss to choose among in terms of potential allocation of wealth here, because there are likely a few variables in terms of how much to liquidate and when to sell.
When you can wrap your head around a few different concrete options to put through the decision-making process, it’s time to explore how you feel about each one:
What’s attractive about each option? What’s concerning or what’s worrisome?
Through this line of questioning, you’ll get a feel for your risk appetite–or aversion–and a sense of what “enough” feels like for you.
I’m glad Michelle mentioned risk appetite, because it’s worth thinking about that term. Most people are anti-risk as a knee-jerk reaction, at the cost of exploring the potential rewards, which can lead to feelings of dissatisfaction on the other side.
Remember: Reward requires risk.
When I’m talking to new clients, their initial response to the question: “What does enough look like to you” usually goes to the tune of, “My last financial advisor told me at my current spending level, if I get to $5 million with an inflation rider, I can retire and spend what I’m spending now.”
That’s very logical and true. And. It sounds like there was zero out-of-the-box thinking there.
That’s where I like to remind people that you are allowed to dream bigger, and a good financial planner can help you plan for that. So perhaps a previous financial advisor has used a calculator to tell you that if you have $5 million in your retirement accounts, you can retire and continue to spend at your current level. Great!
But what if your financial situation could allow you to do more?
What if instead of ONLY worrying about how to make enough to live at your current lifestyle, you could plan ahead so that IF that IPO takes off and you sell at the right time, you could afford to live for a year on a yacht in the south of France?
There is risk involved, just like all financial decisions, especially with something as risky as the stock market. But if you’re willing to take the risk, you might be able to enjoy the reward.
It’s up to you–and your financial advisor–to determine how much risk you’re willing to take on.
In this case, Michelle suggested we go back to the 😀/😞, AKA a Relief/Regret analysis.
As she pointed out, there are two very different personality types when it comes to risk. Some people are downside minimizing (how can I mitigate all risks), and others are upside maximizing (how can I make the most of the potential rewards):
Downside Minimizing
“If I get to $5 million my lifestyle
can stay the same when I retire”
Upside Maximizing
“If I get to $50 million my lifestyle
could exceed my wildest dreams”
A happy face/sad face or relief/regret analysis helps you determine where you land on that risk/reward spectrum, and get clarity about what’s preferred in your outcome, and what’s out of bounds.
So let’s say my client kept all of the concentrated stock because the idea of $50 million is wonderful. That’s our happy face scenario.
Now what’s our sad face scenario? What does the future look like where you regret keeping it all there versus taking some off the table?
Michelle explained that the answer to that question is telling because people who are upside maximizers might not be able to imagine a world where they regret that decision because at least they knew they went for it. And that’s true for them!
There might be other people (our downside minimizers) who are able to name a situation where they regret holding onto those stocks because the value tanks, and they aren’t able to retire when they want to. They don’t need to retire with a yacht, they want to retire early. So they would make a different choice.
Risk often involves emotion, and it’s why decisions cannot ignore feelings. It’s common to demonize emotions in the decision-making process, especially among cognitive types who prefer to think things through in rational and logical ways, but when you understand the information they contain, you can see the value of letting your emotions have their turn.
Unless–and until–you actually think about those possible futures by feeling into them, you will likely struggle with clarity and confidence in your decision making.
The world of money and finance is quantifiable. There are situations where we can run the numbers and calculate “the answer” that makes sense on paper. But that’s not where personal satisfaction or happiness comes from, and that’s why Michelle’s decision-making frameworks are so helpful.
Decision-making confidence comes from knowing you did everything you could to explore the potential options that align with your objectives, then chose the best one based on the information you have.
Having a process gives you a structure to approach your decisions with clarity, because otherwise it can feel very amorphous or overwhelming trying to sort through all the variables.
Even if the outcome isn’t ideal, you have hindsight confidence–instead of regret–because you know your decision was based on more than a Magic Eight Ball.
Why a Decision-Making Process Gives You Confidence and Gets You Out of Resulting Bias (32:25)
The quality of your decision making is not the same as the quality of the outcome.
According to Michelle, one of the biggest misconceptions about decision making is that people sometimes think the quality of their decisions (i.e. whether it was “good” or “bad”) is purely governed by the quality of the outcome.
If the outcome was good, I made a good decision. If the outcome was bad, I made a bad decision.
This is known as “resulting bias”, and it’s just not true. As Michelle explained, the quality of the outcome is determined by more than just our decision. In fact, many of the influencing factors are completely out of our control.
The only thing we can control is the decision-making process we use.
Because of that, the most useful thing you can do is focus on the quality of the process. Even if you are unlucky on the other side, you can look back and know that you made the best decision you could with the information you had, and that you did your due diligence and can point to the process you used to flesh it out.
That’s where you’ll find the decision-making confidence, clarity, and conviction that comes from knowing what’s most important to you–regardless of the outcome.
– Michelle Florendo
TYING IT ALL TOGETHER
Decision-making errors compound like investing errors
Having a decision-making process can save you time, regret, and a whole lot of money.
You won’t hear this in the episode, but as I reflected back on my conversation with Michelle, I couldn’t help but think: Decision-making errors can compound much like financial errors do.
I mean, it’s obvious that if you make a poorly-informed decision again and again (and again), the repercussions of that decision are likely to compound in their net negative effect. We’ve seen this time and again in the financial world.
And, if you’re feeling resistance to the idea of adopting decision-making frameworks, I get it.
If you know me, I’m someone who likes to think fast, talk fast, and move fast. I was initially very resistant to adopting a decision-making process that might slow me down.
But after speaking with Michelle, I can see how accessing the slow-thinking part of our brains and having processes and frameworks to apply to decision making can be incredibly beneficial for our minds, our sleep, and our investment accounts.
Because I don’t know about you, but instead of looking back with regret on decisions I’ve made, I’ll be able to truly say: I made the best decision with the information I had.
Resources and Links Mentioned
Disclaimer
Hendershott Wealth Management, LLC and Love, your Money do not make specific investment recommendations on Love, your Money or in any public media. Any specific mentions of funds or investments are strictly for illustrative purposes only and should not be taken as investment advice or acted upon by individual investors. The opinions expressed in this episode are those of Hilary Hendershott, CFP®, MBA.
