A sense of balance
In my 500th blogpost, I am revisiting the theme of my very first one: the trade-off, how it pervades our decision making, and how we often don’t get it quite right
Nearly ten years ago, I wrote my first blogpost – then only in Dutch (for over seven years now, they have been published in both Dutch and English). It was titled A balance has two arms, a reference to both the mechanics of an old-fashioned set of balance scales, and president Harry S Truman economist advisers who reportedly so annoyed him with their “on the one hand this”, and “on the other hand that”, that he wanted to hire a one-armed economist. In the piece, I wanted to illustrate the importance of considering both the upsides and the downsides of the choices and decisions we make.
Since then, I have written many posts exploring behaviour that looks (or indeed is) a bit odd, viewing it through a (behavioural) economics lens. Economics, especially microeconomics, is a useful framework to explain how we think and how we act, and if you add behavioural economics, you have a pretty comprehensive toolkit to investigate, analyse and explain human behaviour. On the occasion of my 500th blogpost, it seemed a good idea to return to how we handle upsides and downsides, pros and cons, costs and benefits, and apply one of the most fundamental instruments in economics everywhere in our lives (or sometimes fail to do so). Ladies and gentlemen, let’s hear it for the trade-off.
The concept is both deceptively simple and ubiquitous, present in many choices we make. Do we want fresh fruit and vegetables? Sure – who wants stale leeks or overripe bananas? But who wants to go to the shops every day? Quite. So we trade-off the benefit of the freshness of our groceries against the cost of the time it takes us to go shopping, and strike a compromise with ourselves (another word for trade-off). We go shopping once a week, which means we put cauliflower and raspberries with their short shelf life on the menu early in the week, and keep the carrots and apples, which last much longer, for the second half. And should we really crave raspberries or cauliflower on a Thursday, well, then we must make an extra shopping trip.
We may not even realize it, and yet, we seem to weigh up costs and benefits as a matter of course, seeking for a sound compromise.
Sometimes, at least. At other times, it is more questionable, like the event that inspired my first blog: the Portland, Oregon Water Bureau manager decided to flush out 150 million litres of water after some hooligan had been filmed urinating in it.
So where, and why, might we get it wrong?
The wrong trade-offs
The most obvious way to get it wrong is to miscalculate, or to fail to calculate, either the benefit or the cost of a choice we make, and simply assume that we are making the right trade-off anyway. If your car’s fuel tank needs replenishing, will you fill up at the petrol station down the street, or drive to the one at the big supermarket at the other side of town a (3 miles there and back), where it is 6p/litre cheaper? Whatever your preference, you probably have not worked out what it would cost you and what it would save you. Let me help: 60 litres of fuel will save you £3.60, and if you have a very frugal car, the 3-mile round trip will cost you about 50p. But you also need to allocate the wear and tear of your car (though we can ignore the fixed cost, like insurance and road tax, as that is sunk) – let’s call that another 50p. That leaves a net gain of £2.60. But wait: doesn’t your time cost anything? The trip across town will take you about 15 minutes. So now the question that you may never have asked yourself before is, would you really give up 15 minutes in return for £2.60? Another example is that of the extended warranties we are offered when we buy a smartphone or a washing machine: the salesperson paints a vivid picture of a problem with our purchase, just after the legal warranty runs out, and offers us a solution that costs just a fraction of the price of the item. The cost feels small, and the benefit large – but is that really so? In practice, very rarely.
A second mistake we may make is to simply ignore the cost, and focus entirely on the benefit. Earlier this week, a consumer survey found that, in order to improve their purchasing power, 63% of the respondents would prefer prices to fall, with just 37% preferring their income to go up. In terms of increasing purchasing power, there is no fundamental difference between the two. So why might people opt for the price drops rather than the wage hike? Several reasons come to mind. One is that price drops send a strong signal of a bargain: we get more value for money. Another one is that falling prices signal a return to normality, while a raise feels more like a catch-up to prices that may go on rising. A third one is that price reductions are universal, and would benefit everyone, while our own wage increase only benefits us. But the real, rather than the perceived difference between the two is the economic cost: if inflation is bad, then deflation is much worse, and rather than benefit everyone, it would place the most harm on the poorest. Few of the respondents seem to have thought about that.
On a smaller scale too, we often ignore the cost. “Buy now, pay later” offers sound tempting because there is no need to save up to afford the object of our desire, while the interest cost of these “low, low” instalments is disregarded. That new, better paid job is nice, but did we realize that the extra is actually paying us for all the Sunday evenings we spend driving to the airport, so we could be at the client first thing on Monday morning? Is that genuinely a good bargain?
“At all cost”? Really?
We also sometimes ignore the costs that are borne by someone else – the externalities. Last month, during the UK’s COVID inquiry, Chief Medical Officer Sir Chris Whitty was asked about the application of the precautionary principle during the pandemic (in the context of imposing strict lockdowns): “When dealing with pandemics, doesn’t the precautionary principle demand that you ‘go early’ and ‘go hard’?”. He responded that, in the evidence to the inquiry, this principle had been profoundly misunderstood: “The precautionary principle is useful when there are, for practical purposes, no or very minimal downsides compared to the advantages – so, just go ahead and do it. An obvious example was the advice for people to wash their hands. The more an action involves significant costs, not just economic but also to individuals in terms of mental health and so on, the less you can just impose it on people ‘just in case’, in the name of the precautionary principle. That is not an appropriate understanding of what the precautionary principle is, or should be.”
Such situations arise when we seek to achieve, or avoid, something ‘at all cost’. This means that, because the benefit appears existential to us, we stop caring about the cost, including to others (just think of armed conflicts). But they can also arise on a much smaller case, for example the driver who only has an eye for his own benefit: double parking, hazard lights on, meanwhile obstructing the traffic on a busy road – just because he needed to quickly go and buy a sandwich.
The ideal of making sound trade-offs, by thoroughly considering all the consequences of a decision is often elusive. Our innate tendencies to be one-sided in our evaluation, focusing much more on the benefits and ignoring or minimizing the costs (or vice versa) take care of that. At least, this assures me of plenty of inspiration for some of the next 500 posts.
But there may be something we can all do to counteract that tendency, and perhaps make better decisions: find someone equally one-sided, but who takes the opposite view. If there is anyone who can point out in no uncertain terms where we are going wrong, they can.