My daughter is soon due to change schools and I recently spent an hour being shown around a potential destination for the next seven years of her education. As we were being told about how many lunch options there will be available each day, my mind started drifting off into the topic of decision making under uncertainty (a very tedious character trait). Choosing the ‘right’ school for your child can be an incredibly tough decision and, much like investing, the difficulty stems from the challenge of disentangling signal from overwhelming noise.

In England, most children attend different schools between 5-11 (junior school) and 11-18 (secondary school). The jump between the two is significant and in most areas involves a process of assessing a range of secondary schools (relatively) local to you and then applying for your preferred choice. In the area where I live many secondary schools are also selective, meaning that a child must pass an exam if they are to have a chance of obtaining a place.  

For parents, a critical part of choosing the preferred school for your child is a visit. These are near identical irrespective of the school – you will walk around some unusually quiet, well-behaved corridors and classrooms (often with a guide), then you will listen to a generic talk from the headteacher (principal) and hear the experiences of a precocious student and witness a performance by a piano virtuoso.

There is nothing wrong with these events, except they provide you with precious little information about whether the school is likely to be a good fit for your child. Outcome bias is also rife – parents know about the ‘performance’ of these schools in the form of exam grades, so no doubt take these tours with pre-conceived ideas about whether it is a ‘good’ school.

Similar to fund investing, one of the reasons that academic performance carries such a weight in the decisions that parents ultimately make is because it is difficult to know what the most meaningful criteria are. Also similar to fund investing, an obsession with headline performance inevitably leads to some poor decisions.

Not only does strong academic performance seem like a vital indicator amongst a sea of ambiguous information, there are also some other behavioural foibles at play. As parents we like to signal to our contemporaries that our children are smart by sending them to the school with the highest historic grades. We also believe that our child deserves a spot because they are obviously above average – overconfidence by proxy.

There is a jarring disconnect between the idea that the school where your child will be happy will be the school with the highest grades, but this is not the only problem – grades are often a poor guide to the quality of a school because of a major selection bias issue. Selective secondary schools that achieve the best grades will pick the children achieving the highest grades at junior school. There are a range of factors that will impact which children achieve such results aside from ‘general intelligence’, including whether they attended fee paying junior schools, or the socio-economic background of their parents.

Whatever the reason, that many of the most highly rated secondary schools select from the children with the highest academic achievement prior to joining means that their subsequent strong results are the least we might expect. Not necessarily a signal that they are superior institutions.

There are measures of success for a secondary school that are more nuanced than exam grades, such as a ‘value add’ score that seeks to measure how much a student improves; yet these feel less influential than knowing how many people a school sent to Oxford or Cambridge.

Another common decision-making trait when uncertainty is high is the use of gut feel. Parents will often prefer a school because of some form of instinct – usually driven by an experience when visiting – your guide was especially kind, or your child enjoyed the science demonstration. These signals are not without value, but we are likely to hugely overweight their importance.  

Stories and anecdotes are also incredibly powerful. Parents may discount schools as options because someone they know had a bad experience. Again, such scenarios may not be without merit but n=1 decision making is rarely a good idea.

What does my rambling about selecting a school have to do with investment decision making? They are both choices taken under huge uncertainty, where we aren’t always clear what the critical variables are, and where past performance can be misleading.

Amidst pronounced uncertainty we are also prone to strive for more and more information. Past a particular point, however, (earlier than we think) more information leads to greater confidence, but not greater accuracy. Furthermore, obtaining superfluous evidence may well lead us to neglect the things that really matter.

What is the answer? It is not possible to make a high uncertainty decision easy – whether it is an investment view or a new school for your child. The outcomes will be far more heavily influenced by randomness than we would ever like to think. We can, however, attempt to simplify complex decisions by narrowing our focus to the most important things. For most investors, aspects such as valuation, time horizon and cost will likely dominate other factors. Selecting schools can be an even harder choice but being clear and honest about what we care about and why is always a good starting point for a sound decision.

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My first book has been published. The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here (UK) or here (US).