Three Keys to Good Decisions

I’ve been thinking a lot lately about what goes into making good decisions. There are, of course, countless considerations and ways of looking at the decision-making process. So these are not the three keys to good decisions, just three chosen from among many. That said, these are three factors that I often see people, including myself, get wrong:

  • Use absolute numbers, not proportions
  • Ignore sunk costs.
  • Watch out for confirmation bias.

Absolute Numbers Rule

Remember absolute numbers: essentially the positive value of the difference between two numbers. When the decision we’re making has a big number involved, that big number tends to make other numbers seem inconsequential. Ask a few people to assume that they are about to buy a TV for $800 at a store 30 minutes away. They open up the newspaper and see an ad for the same television on sale for $200 at a store that’s a two-hour drive away.

Would they drive three hours round-trip for that amazing deal?

Now ask the next few people to imagine they’re buying a $52,800 luxury car and they find out that they can get it for $52,200 two hours away.

Researchers find that when faced with this type of question, people will commonly say they’ll drive the two hours each way to save on the television, but rarely for the car. Why? Because it seems like an inconsequential part of the price of the car, so not much of a deal. But in both cases, the total savings is the same. It should either be worth $600 to drive for three hours or not. The price of the item you’re buying shouldn’t matter.

Strategy: Look at the absolute number that’s truly at play and ask yourself: if someone were to give you the cash to make the same decision, how would you decide. In other words, if someone said “I’ll pay you $600 to drive around for three hours for no particular reason” would that be worth it to you? If so, then the deal in the other town is worth it. If not, it’s not. The total price of the item makes no difference.

Forget Sunk Costs

A friend opened my eyes to this one many years before I had the name or the concept of sunk costs. He went to a movie that had a terrible, violent opening that completely turned him off. He walked out after five minutes and told me later, “I had already wasted seven bucks, I didn’t see the point in wasting two hours on top of it.”

Sunk costs are costs that you can never recover. Let’s say you’re writing a book and you’ve worked on it for 500 hours and you realize that at the rate you’re writing, it will take another 500 hours, for a total of 1,000 hours. There are two possible traps here.

  • You feel like it’s not worth another 500 hours, but you can’t give up because you’ve already put in so much work and you can’t bear to let it go to waste, so you stick it out and finish.
  • You feel like the book simply is not worth 1000 hours, so decide to quit.

However, since the first 500 hours are gone and can never be recovered, they shouldn’t count in your decision. What matters at this point is whether you should spend the next 500 hours on the book.

The proper question is: if I were starting from scratch today and knew that I could complete the book in 500 hours, would I think it was worth it? 

There’s another, interesting version of this that Dan Ariely talks about in Predictably Irrational. They asked people to imagine they were going to a concert where the tickets cost $80. They then asked one of two questions:

  • You buy tickets in advance. On the way, you lose your tickets. Do you buy another ticket at the door and go anyway?
  • You’re planning to buy tickets at the door. On the way, $80 falls out of your wallet, but you still have your credit card and the rest of your money. Do you still buy a ticket and go to the concert?

People who lose the ticket are much more likely to say they would turn around and go home because they couldn’t bring themselves to spend $160 for the concert. People who just lost the money, though, didn’t see that as a cost of the concert, so they were less likely to change plans. But in fact, all that really matters is whether you have the budget to lose $80 in whatever form and still spend the $80 on the tickets. If it was worth $80 to you originally and it’s still worth $80 to you, it makes no difference whether you lost $80, lost a ticket, or found a Franklin on the sidewalk. What happened before is a sunk cost and not part of this particular decision, except insofar as $80 would break your budget for the week.

Confirmation Bias

When we arrive at a decision, we then tend to look for corroboration. I catch myself doing this a lot in my scholarly work. This is typically the way criminal investigators work: find a likely suspect and then gather evidence to prove the case. From a consumer point of view, you find what appears on first look to be the best camera for you, then you look for other positive aspects.

The problem is that the information that you uncover early in the process is not necessarily the most salient information and yet, because of confirmation bias, you’ve closed yourself to other options.

When doing scholarly research I try to divide my investigation into a discovery phase and an analysis phase.

  • First frame the question properly. Don’t ask “Is Little John the same as John Jacobs?” but rather “What do I know about Little John?”
  • Then gather a set amount of data (“I will consult these five sources”) before starting analysis.

This increases the possibility that you will still be open to contradictory information that comes to light late in the process.

Then always ask this question before making a final decision, “If I knew when I started what I know now, would I make the same decision?

Putting It Into Practice

Of course, even if this helps with analysis, making the right decision can still be hard. I have a friend who, after seven years of study (sunk costs) was about to become an ordained priest. Meditating the night before on a prayer of Saint Francis, he realized that he would never have entered seminary if he had known what he knew at that moment, seven years later, about the support he could count on from his community of brothers.

In other words, he had overcome the confirmation bias problem. From there, it took an act of will and great courage to ignore the sunk costs not just of the seven years, but also the sunk costs of commitments to family and friends to whom he had said he was becoming a priest.

It was not an easy decision, but by framing the question correctly, it was possible to make the right decision for him. But as his case shows, often courage is more important than reason and courage is harder to learn.

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