Decision making is a process of making choices among alternative courses of action. Decision making process involves a cycle of activities and events that begin with identification of a problem and ends with the
evaluation of implemented solutions. In this essay I will discus the steps in the decision making process that I have applied to a decision that I have already made in my life. In fact I have made numerous decisions in my life such as joining a tertiary institution, getting married at the age of 25, having a child, buying a car and buying a house as well. In this essay my focus will be on buying a house.
The first step of identifying and defining the problem became very urgent because I was renting a house for $300 per month. I had been renting from year 2000 till year 2005. I spent about $21,600 in rent for 6 years! Therefore I had a discussion with my wife to buy a house since we were not in a position to migrate overseas in the near future with just a diploma in education. The money that we would spend on rent will be used to make down payments.
Generating and evaluating possible solutions towards buying a house was the step that I had skipped since one of my uncles had already seen the house that I initiated to buy and my wife had already desperately wanted that particular house. So this effort to locate, clarify, and evaluate alternative solution did not make sense to me at that time. I think this was not the best possible solution. I will discus this later in this essay.
In this step I chose the behavioural decision model. I acted on the assumptions on what I had perceived in the first place. This was the first satisfactory decision that came across my attention. I was imperfect in my decision making and I had only partial knowledge on the property that I was interested to invest in.
To implement my decision I had to secure a loan. The total cost of my investment was $80,000. I borrowed from Fiji National Provident Fund from my housing eligibility which became my initial deposit to the bank and the rest was funded by Colonial National Bank at an interest rate of 6.99% per annum for the first year and thereafter on a flexible interest rate. This meant that I did not have to use a single cent from my personal savings. Thus to implement my decision on buying the house had no obstacles.
Finally I bought the house. I had to make a down payment of $525 per month. Initially I had thought that I won’t have difficulty in committing for my loan repayments. Instead of $300(which I used for my rent while I was renting), I had to commit another $225. Carefully I calculated that I will end up with no savings if I continued with my payments. The following year the interest rate was also anticipated to increase. So I evaluated my decision and made another (two bedroom) flat adjacent to the existing building worth $10,000 (which was part of my personal savings). I went to stay in this flat. The front flat was given on rent for $500 per month. Finally my payments were back to normal.
The insights that I have learnt as a decision maker are:
1.) The benefits of my financial decisions.
• I had long term capital growth.
• Full rents paid to my nominated bank account-this helps my cash flow.
• Short to medium terms-tax variations, tax minimisation and negative gearing-this helps legally reduce the tax I pay.
2.) The cost-benefit analyses regarding my financial decision
Each time when we make decisions new insights will be developed and might weigh the criteria’s performance differently. This makes for ineffective decision making or decision making mistakes. This also complicates learning from the decisions we make, as the bases for judging the outcomes changes each time.
My second step towards buying the house could have been done more thoroughly. In fact there is nothing wrong with the location of my house, but if I would have invested the same amount of money in Nadi or in Lautoka City, I would be earning more than double the amount of money as rental income. This would mean I would still have to rent though.
I also did not do sound financial planning and risk management framework in the beginning. I must have structured my financial commitments to suit my lifestyle needs and objectives before making the decision to buy the house. This is due to the fluctuating interest rates since currently my down payment per month is $721.
Further I must have consulted a professional advisor who should have been very independent regarding the decisions that I should have made. This would have sorted out:
• the location of my investment
• my daily/weekly/monthly financial commitments
• where to commit my finance from. (The only financial institution that I consulted was Colonial National Bank)
Finally I would like to say that decisions must be made using a pre-defined decision making process and skilled decision analyses.
They are based on the values and perceptions of the decision maker and include carefully considered alternatives (choices) and options along with periodic validation of the decision and its effects.
Wise Decisions may or may not follow external influences and expectations. Sound decisions are right, based on what one knows at a given point in time.
What I have observed, is that Good Decision making is not an accident. It is a repeatable process. Good decision makers take a systematic approach to their decision making. They know or understand what situation they need to resolve and why they need to resolve it. They eliminate distractions, anxiety, subjectivity, and individual bias from the process.
They generally create multiple potential solution options from which to choose. They make their choices based upon relevant facts and information, not on partial or conflicting data.