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Decision Frameworks

Difficulty intermediate

Overview

Decision frameworks provide structured approaches to trading decisions, reducing emotional interference and improving consistency.

The OODA Loop

Observe → Orient → Decide → Act

Observe: Gather market data, news, signals
Orient: Analyze context, compare to models
Decide: Choose action based on analysis
Act: Execute the trade

Expected Value Framework

For each trade:
EV = P(win) × Avg_Win - P(loss) × Avg_Loss

If EV > 0 → Take the trade
If EV < 0 → Skip the trade

where: P(win) probability of a winning outcome · P(loss) = 1 − P(win) · Avg_Win average dollar gain on winners · Avg_Loss average dollar loss on losers (positive number). does: the trade-level expectancy calculation. The single decision rule that should sit above every entry — if EV isn't clearly positive net of costs, the trade is gambling, not investing.

Regret Minimization

For each decision, consider:
1. Best case if I take it
2. Worst case if I take it
3. Best case if I skip it
4. Worst case if I skip it

Choose the action that minimizes maximum regret

Handling Uncertainty

Scenario Planning

For each trade, define 3 scenarios:
1. Base case (most likely): 60% probability
2. Bull case: 20% probability
3. Bear case: 20% probability

Weighted expected outcome = Σ(probability × outcome)

where: probabilities must sum to 1 across all scenarios · outcome dollar P&L (or return) under each scenario · summation runs over all defined cases. does: forces explicit articulation of bull/base/bear before clicking. The act of writing down both probabilities and outcomes is what reveals trades with attractive base cases but unacceptable bear tails.

Confidence Levels

High Confidence (80%+): Full position size
Medium Confidence (60-80%): Half position size
Low Confidence (40-60%): Quarter position size
Below 40%: No trade

Common Decision Errors

Error Description Fix
Analysis paralysis Too much data, no decision Set decision deadline
Confirmation bias Only see supporting evidence Seek disconfirming data
Sunk cost Holding because of past investment Evaluate current situation
Recency bias Overweight latest information Review full history
Overconfidence Too sure of outcome Use probability ranges

Practical Guidelines

  1. Have a Framework — Don't decide ad-hoc
  2. Be Consistent — Use the same process every time
  3. Document Decisions — Write down reasoning before acting
  4. Review Outcomes — Compare decisions to results
  5. Refine Over Time — Improve your framework based on data
  6. Trust the Process — Even good decisions can have bad outcomes

Next Steps