Trading is a zero-sum game, there must be a loser for every winner, so you might think that either you can be only wrong or right for any given trade. A trader friend of mine broke down for me the decision analysis process he takes when evaluating his performance. He argued that it is not just about being right or wrong, or having good or bad ideas; you also have to account for the environment in which you are making decisions.

The decision analysis can be broken down into four main parts and looks something like this:

1. Good idea, good outcome
   1. You use individual thought and analysis to decide the MBS market is broken and initiate shorts around Summer 2007.
2. Good idea, bad outcome
   1. You realize the economy is getting back on track and believe it is time for the Fed to fade its easy money program, so you initiate shorts in anticipation of upcoming Fed announcement, who decide to maintain the low-rate environment for the foreseeable future.
3. Bad idea, good outcome
   1. Getting seriously lucky.
4. Bad idea, bad outcome
   1. You decide, “Hey, Enron is just going through a tough time and their valuation is cheap, I’m in at this price.”

This decision analysis is not only applicable to trading. VCs, even founders can use this method to track their decisions and learn from them.

1. Good idea, good outcome
   1. You decide there is a market for personal computers, turns out there is quite a massive opportunity. You name your company after a fruit.
2. Good idea, bad outcome
   1. You discover a massive opportunity in a market that lacks competition, just before raising money, another, much better brand emerges from stealth and swallows you whole.
3. Bad idea, good outcome
   1. You think that the world needs disappearing photos and videos. Your last name rhymes with Gollum’s real name, Smeagol, and now you have a multi-billion dollar business. “My precious…”
4. Bad idea, bad outcome
   1. You decide people care enough to create social media accounts for their dogs. Woof.

There is an alchemy in decisions, big and small. The more calculated decisions are the more likely they will overcome the environment they were made in.