A decision matrix is a useful tool to evaluate and prioritise your options when you have complex decision-making situations. The steps to create a decision matrix spreadsheet that can track good decisions, bad decisions, outcomes, and their interrelationships are as follows:
Step 1: Define your criteria
The first thing you need to do is to clearly define your criteria. What are the factors you consider when making decisions? This could be the likelihood of success, the cost, the time required, the risk involved, or any other factors that are important to you. These criteria will form the columns of your decision matrix.
Step 2: Identify your options
Next, identify the options you’re considering. These could be different strategies, actions, or alternatives available for your decision-making. Each option will be a row in your decision matrix.
Step 3: Rate each option for each criterion
Now you need to rate each option against each criterion. For example, if one of your criteria is the likelihood of success, you would rate each option on how likely it is to succeed. These ratings can be on a scale from 1 to 10, or you could use a different scale if that suits your needs better.
Here, you would also be noting down whether it was a good decision or bad decision, and the corresponding outcome. A simple binary score (e.g., 0 for bad, 1 for good) could be used.
Step 4: Apply weights to the criteria
Some criteria might be more important to you than others. For instance, you might value the likelihood of success more than the cost. In this case, you should apply a weight to each criterion to reflect its importance. This weight could be a percentage, with all the weights adding up to 100%, or a score out of 10, with the most important criteria getting the highest score.
Step 5: Calculate the weighted scores for each option
Now that you have the ratings for each option and weights for each criterion, you can calculate the weighted scores. This is done by multiplying the rating by the weight for each criterion and then summing up these products for each option. The option with the highest total score will be your best option.
Step 6: Analyse the results
Lastly, analyse the results of your decision matrix. This will help you understand the rationale behind your decisions and the associated outcomes. For instance, you might find out that a seemingly good decision led to a poor outcome because it had a high risk that you hadn’t considered thoroughly.
Here’s an example of what your decision matrix might look like:
| Criterion 1 (weight: 0.4) | Criterion 2 (weight: 0.3) | Criterion 3 (weight: 0.3) | Total Score | Decision (Good:1, Bad:0) | Outcome (Good:1, Bad:0) | |
|---|---|---|---|---|---|---|
| Option 1 | 8 | 6 | 7 | 7.1 | 1 | 0 |
| Option 2 | 7 | 8 | 6 | 7.0 | 0 | 1 |
| Option 3 | 6 | 7 | 8 | 7.0 | 1 | 1 |
In this table, the total score is calculated as follows: (rating of criterion 1 * weight of criterion 1) + (rating of criterion 2 * weight of criterion 2) + (rating of criterion 3 * weight of criterion 3). For example, for Option 1, the total score would be (8 * 0.4) + (6 * 0.3) + (7 * 0.3) = 7.1.
Applying the Decision Matrix for Better Investing Results
The decision matrix can be a powerful tool for enhancing your investing results. It allows you to systematically assess different investment options based on clearly defined criteria, which can help you make more informed and rational decisions. Here’s how you can use the decision matrix for investing:
Step 1: Define your criteria
In investing, your criteria might include factors like potential return on investment, risk level, time horizon, liquidity, and alignment with your investment goals or strategy. For instance, if you’re a risk-averse investor, you might assign a higher weight to the risk level criterion.
Step 2: Identify your investment options
Your options could include various types of investments, such as stocks, bonds, mutual funds, real estate, or even specific companies or sectors within these categories. Each investment option will be a separate row in your decision matrix.
Step 3: Rate each investment option
For each investment option, rate it based on each of your criteria. For example, you might rate a specific stock 8 out of 10 for potential return, but only 4 out of 10 for risk level, indicating that it could potentially deliver high returns but is also associated with high risk.
Step 4: Apply weights to your criteria
If some criteria are more important to you than others, reflect this by applying higher weights to those criteria. For example, if risk level and potential return are the most important factors to you, you might assign them weights of 0.4 and 0.4, respectively, and the remaining 0.2 to other factors.
Step 5: Calculate the weighted scores
As with any decision matrix, calculate the weighted scores by multiplying the rating by the weight for each criterion, and then summing these up for each investment option. The options with higher scores would typically be your best options based on your defined criteria and weights.
Step 6: Analyse the Results
Finally, analyse the results of your decision matrix. This will help you make more informed investment decisions and understand the rationale behind those decisions. Remember, though, that the decision matrix is a tool to aid in decision making, not a substitute for your judgement. Always consider other factors and do your due diligence before making investment decisions.
By using a decision matrix, you can bring a greater level of objectivity and analytical rigor to your investment decisions, potentially enhancing your investing results and helping you reach your financial goals more efficiently.