demonetisation decision

Demonetisation Decision was Great, But Not for the Reason You Think

As we approach another anniversary of India’s demonetisation decision there will be the usual flurry of political and economic discussions praising or condemning it.

This article though is about a different aspect of that experiment.

Demonetisation was great because it offered excellent insights into the challenges of decision making for a working professional like you.

And here is the best part:

You can apply these insights not just for making better choices at work but it can also help you make smarter money decisions in your personal finance life.

How Demonetisation Can Help You Make Better Money Decisions

The quality of decisions that you make (hopefully) continues to improve as you progress through your career and life.

This improvement comes from the information you get about the outcomes of the previous choices that you made.

Some of the choices that you make go well and others less so.

As a result you try to do more of what went well and less of what did not go so well in the past. We learn not just by looking at our own decisions but also from those made by others.

Demonetisation was one such opportunity. It is very rare to have the chance to see the process and challenges of decision making in action at such a large scale in real life.

demonetisation decision

Second Order Effects are Hard to Visualise

Every action that you take has a direct consequence. These are the so called first order effects and are relatively easy to predict or anticipate.

After the demonetisation decision it was easier to predict that people would be forced to give up the old currency notes.

The next stage is where it gets tricky because every consequence has further consequences and so on. These are known as the second order consequences and are much harder to anticipate or prepare for.

That people would be willing to pay double the price to buy gold or adopt other ingenious ways to get rid of old currency notes is relatively harder to visualise.

Your Personal Finance

You know that the later you start saving for retirement, the lesser the money you will have when you retire. That is a direct / first order consequence of your action.

However, the second order effect of that decision is harder to visualise.

It might also mean that you become dependent on others to take care of you financially or develop strains in your social relationships that look pretty steady today.

A link between your retirement saving and the health of your relationships does not come naturally to us.

So when making choices about saving or spending money it helps to look beyond the obvious consequences. Try and visualise the second order consequences of what you are about to do.

It might help you make a better financial decision.

Not Every Decision Can Have a Pilot Project

In the ideal world, we could have divided the Indian economy into two equal parts in November 2016.

One half of the economy would then be subjected to demonetisation, while the other half could continue as usual.

Several months later we could have measured both parts and the results would have been obvious for all to see if demonetisation was good or bad for the economy.

Unfortunately splitting an economy into two does not work in the real world. Some decisions simply don’t give us the luxury of doing pilot projects.

Your Personal Finance

Some initiatives that we take can be done in small steps. For example, you can put some money in a mutual fund and see how things go.

If you are happy with the outcome then you can invest some more at a subsequent stage.

However buying a house is a different matter. You can’t buy a single bedroom and then decide to buy the rest of the house later depending on the quality of your sleep.

There can’t be a pilot project when you are buying a whole house so that makes it a relatively risky decision. The only thing you can do is to prepare as much as possible in advance but also accept that the decision will need to be taken as a whole.

Some investments require a leap of faith knowing well that things may not turn as you expect.

The Right Decision to Make is Obvious – In Hindsight

A professional like you will rarely (if ever) have all the required information or data when a decision has to be made.

Picking options under uncertainty is the reality of our professional lives.

It is not easy to predict what your competitors or the business environment will do once you have selected a certain course of action.

At some stage in the future when the impact of that decision is analysed we have much more information to make that analysis.

Knowing what we know now about how demonetisation played out, there are a number of areas where the demonetisation decision could have been handled differently.

Similarly, armed with new information it is very tempting to blame a business manager for lack of foresight when making the decision. It is difficult to recreate the scene that existed in the past.

Our thinking gets influenced by the current available information about what the competitors or the market did.

Your Personal Finance

Won’t it be great if we could jump 10 years into the future and see which investments are likely to do the best?

With the benefit of this information we could easily decide where to invest our money today.

However decision making is all about making a call on the future and future by its very nature is uncertain.

You can handle uncertainty by diversifying your investments.

Something that may look like a great idea when you think about it today may turn out to be very different 5-10 years from now. It may turn out to be better or worse than you expect.

However, by not putting all your eggs in one basket you can emerge a winner no matter how the future turns out.

Some of your investments may perform better than you expect while others will do worse. On a whole though you are likely to be in a much better financial shape than you are today.

Confirmation Bias Can Make Us Blind

Confirmation bias means that we only notice new facts or information that further confirm what we already believe to be true. We tend to ignore new information that does not align with our pre-set opinion.

There are too many moving parts in the Indian economy as well as linkages with the wider world. It is almost impossible to attribute 100% of any major economic outcome to the demonetisation decision alone.

Some economic developments (good or bad) would have happened anyway even if India had not gone in for demonetisation.

However, depending on your own personal views, you may only notice the economic outcomes that align with that view.

Your Personal Finance

You might have made an investment many years ago based on some information available back then. Maybe it was a piece of land outside the city or the stock of a growing company.

You obviously thought it was a good investment to make based on the info available at that time.

Now relook at that investment today.

Are those reasons still relevant today or are you ignoring the new facts that have become available?

Maybe the industry the company operates in is about to get obsolete or it might be falling behind its competitors.

Are you still holding on to your earlier beliefs despite knowing new facts?

If so it may be time to review that investment based on the facts that you now know.

Decision Making Takes Courage

A general taking his troops into the battlefield or a leader tasked with taking a nation ahead have something in common.

They are both expected to make decisions and that takes courage. The cost of not making a decision can lead to loss of lives in the battlefield.

History has shown us that great things have only been achieved by generals or leaders who made active decisions rather than settling for the status quo.

Imperfect action is better than perfect inaction in most cases.

Your Personal Finance

Given our busy lives it is easy to stay with the status quo about your money. That means letting your savings sit in a low interest savings account.

However a smarter step would be to invest it in a productive asset as part of a financial plan.

Investing in assets will not make you rich overnight but will still be much better than the status quo of a low interest savings account.

Continuing with the status quo is tempting but will make it harder for you to reach your financial goals.

If your intention is to attain financial independence then you need to take some active decisions about your money while being aware of the risks.

demonetisation decision

Conclusion

Regardless of your political or economic ideology about the demonetisation, it can help you make some better decisions about your personal finance.

Demonetisation was the kind of decision that we don’t see very often playing out right in front of us.

Let us leave it to the historians to judge if it was a good or a bad economic decision.

You can focus on the lessons it delivered about making smarter decisions for managing your money.

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