Life is a mixture of problems, opportunities and things you don’t understand well enough to decide which. Everyone has that situation, and how they resolve it tends to shift their life toward its result. People who discover the approach that works and implement it well do better.
Most of us have no training or education in economics, and that allows us to miss the most important aspects.
Economics is about how people deal with scarcity. There is not enough of anything to satisfy everyone’s wants and needs. There must be some way we allocate scarce resources. Allocation across society is macroeconomics. For individuals, it is microeconomics. Both have lessons, but beginning as amateurs economists, we can study the micro side and expect it to show us situations with which we are familiar.
The common scarcities in micro are time and money. Sometimes energy, enthusiasm, and motivation. How you create the best mix of desired outcomes with scarce resources will tend to decide success.
There is a part of economics that deals with decisions. It is “Rational Choice Theory.” It is a theory that proclaims that people make calculations and apply them rationally to get their desired outcome. There may be someone who does it that way, but I have found people use that process only to rationalize decisions they have already made. The outcome becomes a variable and sometimes with delusional rationalization.
You cannot spend a given hour or a given dollar twice. You can’t have your cake and eat it, too, is the old way of expressing that point. It doesn’t really carry us far. Let’s think about it a little differently.
Time and money are scarce, and problems and opportunities are plentiful. What is the best way to allocate resources? At its core, that is the Chief Executive Officer’s role. Resource allocation is the single most significant factor in business success. In your life, too. Not many think about it that way.
An economic idea is “diminishing marginal returns.” That means as you acquire more of a good or service, the added increment produces less satisfaction or costs more than the earlier acquisitions. For example, I might like a Porsche 911 Targa. If I got one, I am sure I would enjoy it. If I bought another, so I had two, would the second one give me the same feeling? Maybe not. Certainly, the 10th one wouldn’t. Each costs the same amount, but the value achieved for the later purchases will shrink.
On the cost side, it doesn’t cost much to half solve a problem. Even 80% might not be too hard, but as you approach 100% solved, the price of each additional increment costs more than its predecessors. A similar concept is “diminishing marginal returns.” It’s the mirror image of diminishing utility. In programming, the observation is that you can get 90% of the solution for 90% of the budget and have most of the rest for the other 90% of the budget. Approaching perfect means approaching infinite cost. You don’t have unlimited resources and so must settle for less.
Herbert Simon was an American political science theorist. He won the Nobel Memorial Prize in Economics in 1978 for his work on decision-making.
He contributed two important thoughts. Bounded Rationality and Satisficing.
Bounded rationality recognizes that perfection is impossible because people lack the ability to be perfectly knowing and rational. The rational calculation part of Rational Choice Theory comes up short because people don’t have all the information, can’t have is more accurate, and the “apply rationally” part has externalities like social acceptance and personal relationship conflicts. The endpoint of this thought is we make decisions that are rational yet not perfect. Bounded.
We try for the best answer given the information, skill shortfalls, and conflicts inherent in our lives.
Satisficing is one of my favourite words. It is a combination of satisfactory and sufficient. It recognizes the futility of perfection and asks if there are “good enough” decisions that minimize the use of resources and provide an adequate answer to the situation at hand. Sufficient is the harder part, and it requires some thought.
Life is multi-dimensional, and combining that with diminishing marginal returns, utility, and scarcity, we should notice that we have to manage the system, not the individual components of it. None of us have enough resources to solve everything perfectly, and so we must allocate what we have to make the whole of it work better, ideally optimally. That’s the CEO’s job.
We do that by recognizing the result of satisficing. Think of it this way. If you have three problems and enough resources to solve one of them to 98% or all three to 80%, which approach would (should) you choose? You can’t answer without situational awareness. That kind of thinking is important.
An unaddressed problem is like a negative resource. It gets in the way of solving the others. A good enough solution, while imperfect and likely requiring more effort in the future to make it better, shrinks the friction. That’s a win because when you revisit the 80% solution some other day, you will know more about it. The situation will be different from what you anticipated, and less of it will need to be torn down and replaced. Good answers evolve.
“Good enough” is not easy. You must be careful that it is not an excuse for a haphazard answer. Good enough is a step along the way and tries to optimize totality, not address a single aspect.
“Perfect” addresses single situations and tends to fail. It is a truism in manufacturing that if you perfect a single step in a 10-step process, you will suboptimze the whole. The perfect fifth step will be too fast for its siblings, and the extra spent perfecting it will be invested in letting it be idle while the other steps catch up. Wasted scarce resource.
Perfection is a trap. Avoid the idea.
Understand priorities. Some solutions must necessarily be “more good” than others. Many of those relate to risk reduction.
Match the solution to its need for perfection. Is it necessary for the solution to be bullet-proof or merely bullet-resistant? When I was in the accounting business, one of our tax specialists offered this answer to a technical tax question. “I can give you the 80% right answer in 15 minutes, or the client can spend $20,000 for a 98% right answer. There is no 100% right answer.”
Understand satisficing. Sufficiently satisfying is a very powerful decision-making concept.
I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software startup, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning and business matters. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Federal Business Development Bank.
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