Farnam Street Blog is a daily destination reading destination. Shane Parrish writes mainly about decision making, and today’s post linked back to one about a decision notebook. As almost everything these days related to thinking seems to do, the idea originated with Daniel Kahneman.

The below is from Michael Mauboussin, author of The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing, speaking about advice from Daniel Kahneman, the psychologist who won the Nobel Prize for economics in 2002:

When I pose [Kahneman] the question, what is a single thing an investor can do to improve his or her performance, he said almost without hesitation, go down to a local drugstore and buy a very cheap notebook and start keeping track of your decisions. And the specific idea is whenever you’re making a consequential decision, something going in or out of the portfolio, just take a moment to think, write down what you expect to happen, why you expect it to happen and then actually, and this is optional, but probably a great idea, is write down how you feel about the situation, both physically and even emotionally. Just, how do you feel? I feel tired. I feel good, or this stock is really draining me. Whatever you think.

The key to doing this is that it prevents something called hindsight bias, which is no matter what happens in the world. We tend to look back on our decision-making process, and we tilt it in a way that looks more favorable to us, right? So we have a bias to explain what has happened.

When you’ve got a decision-making journal, it gives you accurate and honest feedback of what you were thinking at that time. And so there can be situations, by the way, you buy a stock and it goes up, but it goes up for reasons very different than what you thought was going to happen. And having that feedback in a way to almost check yourself periodically is extremely valuable. So that’s, I think, a very inexpensive; it’s actually not super time consuming, but a very, very valuable way of giving yourself essential feedback because our minds won’t do it normally.

He’s writing above from the perspective of public securities, but I’ve often thought about something similar from the perspective of venture capital. We obviously spend a lot of time with our portfolio companies so it’s natural to think of what went wrong with companies that didn’t succeed—though even then I don’t see many people do that systematically.

But far less common is thinking about the companies that did succeed yet aren’t in the portfolio. Bessemer Venture Partners has a pretty amusing anti-portfolio on their website listing some of their major misses. I can only assume they do this sort of analysis systematically, which if true, would certainly explain at least a part of their dramatic success.

Kahneman makes the point above about individual investors, but I believe there’s a broader implication: a firm could institutionalize this sort of transparent record-keeping where all investors openly keep track of their decisions. Again, the companies that end up in the portfolio would likely be well-documented and a natural focal point so the key would be documenting the companies that didn’t make it into the portfolio.

Then, periodically, perhaps quarterly, the firm would review a list of companies that weren’t in the portfolio and had successful outcomes (or were tracking to successful outcomes). It would ask itself why they had passed on those companies and what part of the process could be improved.

And that’s assuming it had the chance to invest in those companies. In stark contrast to public investing, access is key in private markets. So for the companies that were successful that the firm never even had the chance to invest in, the process improvement would focus on why they never got a look.

By regularly asking themselves, one, what high quality companies they never saw and, two, why they passed on winners, they could identify gaps in their capabilities. Together with an institutional culture of improving their capabilities, a separate topic, such a firm would have a tremendous advantage.