I recently sat down with Tom Wiseman, chair of the Economics department at UT. Tom told me that virtually all of his administrative headaches come from just 1-2% of his students. Some of these matters deal with disciplinary violations like cheating, but most are innocuous—a student slept through an exam, or forgot to make a tuition payment by a deadline, or something like that.

He didn’t feel like these 1-2% of students were consistent screwups, or had some deficiency in character. He said that they just had a bad day, and seemed pretty forgiving of them even though they were adding a lot of paperwork to his plate. Tom said that each year, consistently, he himself has one truly bad day where he makes inexplicably poor decisions.

That’s probably also true for me. Once in a while, I also make an inexplicably bad decision and sometimes follow it up with a string of bad decisions.

What’s going on here?

Why Bad Days Happen

Randomness is an inherent property of the universe. Random good things can happen, and random bad things can happen.

Let me rephrase that: Random good things can will happen, and random bad things can will happen.

This is Tom’s basic point—no matter how good of a year he has, and no matter how thoughtful his decisions normally are, at some point he will simply have a bad day. That’s not a character flaw and it’s not an indictment of the way he lives his life. It’s just randomness.

I’ll boil this concept down to accepting that nothing is perfect. As a portfolio manager, no matter how good my decision-making process is or how thoroughly tested my trading strategies are, there are going to be situations that I can’t anticipate that will cause my plans to go haywire. I have to accept going in that it’s impossible to account for every factor and plan for every eventuality. At some point, something is bound to get screwed up somewhere.

Does that mean we shouldn’t do any planning or preparation in advance?

Risk Avoidance vs. Risk Mitigation

Some risks can be avoided entirely. Others can only be managed by reducing their impact.

Let’s take driving as an example. If a person is consuming alcohol at a social event, getting into a car afterwards to drive home is a dangerous risk that can be avoided entirely by using a ride-sharing service or by not consuming alcohol in the first place. A risk that cannot be avoided is the risk of getting hit by somebody else that has chosen to drive while drunk. That is a risk that can be at best mitigated by extra safe driving behavior, like watching carefully for other cars at stop signs and red lights.

While I don’t think we can avoid bad decisions entirely, there are two things we can do to mitigate the chances of making bad decisions.

Managing Anger

People probably make more bad decisions under the influence of anger than any other emotion.

I wonder how many people reading this blog can trace their “bad decision day of the year” to a day when they were emotionally dysregulated, and said something they regret to their spouse, a family member, or a work colleague during a state of anger. The emotion afterwards is often regret or guilt, accompanied by a sentiment of “I wish I could take that back.”

The way to mitigate this risk is to get our latent, repressed anger out of our system under safe conditions, so that it doesn’t erupt in an uncontrolled way when we are in the midst of a difficult conversation with said spouse, family member or colleague. It’s still possible that we’ll say something we’ll regret, but in my experience the chances are much lower.

Caring for Your Body

The other situation in which I tend to make bad decisions is when I’m neglecting my body—food, sleep and sometimes physical movement.

There’s mountains of evidence showing how the frequency of car accidents goes up when people get inadequate sleep, like the day after switching from daylight savings time. I know from personal experience that extended calorie deficits affect me very negatively.

If the body is the temple of the mind, then it makes sense that taking care of the body can help the mind to function better. It won’t eliminate our odds of making a bad decision completely, but will improve the average number of good decisions.

Building Risk Tolerance

Even if we do the best we can to avoid and mitigate risk, we still have to accept that random bad events will happen to us. In this case, we want to be able to survive the bad thing happening. This is risk tolerance—the ability to absorb losses and continue moving forward.

Long-term players in the game of finance believe that it’s more important to survive any given market cycle than to maximize returns from it. We call this “preservation of capital.” We know that there are trades that will go against us, and that there will be major events that we can’t anticipate. Our goal is to be able to withstand those shocks and live to fight another day.

In Tom’s case, if he knows that some tiny portion of students are bound to create time-consuming administrative headaches, what can he do? In finance, we would allocate “loss-absorbing capital” to the investment. For an administrator like Tom, this would be anticipating a certain amount of bureaucratic paperwork time each semester to dealing with student problems, and probably with a cushion—so if he normally spends a week dealing with admin, allocating 8 days (extra time). This would require Tom to say no to certain other work tasks, in the same way that a portfolio manager maintaining some loss-absorbing capital will have to say no to some trades in order to keep some cash free.

Conclusion

Bad days are inevitable. We can’t eliminate them completely, but we can reduce their frequency, limit their damage, and prepare ourselves to survive them when they do come. That’s what planning and taking care of ourselves is really about.

Exercise

Journal on the following or discuss with a friend.

1)      Reflection

What role does “bad luck” play in my life? Do random bad events happen to me?

What role do I play in this bad luck by making bad decisions? Even if I typically make good decisions, are there times where I simply make the wrong call, without an underlying pattern?

2)      Risk Avoidance and Mitigation

If I make consistently bad decisions in a particular area, what can I do to avoid bad situations entirely?

Do I tend to make bad decisions out of anger, or when I am ignoring my physical needs?

If I can’t avoid bad situations entirely, what can I do to minimize the risk of harm to myself or to others?

3)      Risk Tolerance

Can I accept that no matter how well I optimize my life, decision-making habits, and preparation, I will still occasionally make bad decisions and bad things will still happen to me?

What can I do to withstand these inevitable drawdowns? What does “loss-absorbing capital” mean in my life?

Is it extra time or money I have budgeted? If I am already stretched, is it saying no to adding more things to my plate?