Economist’s Guide to Aware Decision Making | Aman Speaks on amanspeaks.com
‘When am I ever going to use this??’ If this thought never crossed your mind in undergrad, you’re either lying to yourself, or you studied Computer Science (cue laughter). But seriously, from esoteric lectures on classic French literature to learning the Pythagorean Theorem for the 10th time, we can all relate to having learned something that truly added no value to our lives, not now and definitely not then. If you think critically, however, maybe some of those old lessons have manifested into our lives in some way, shape, or form. I know they have for me.
Years had passed since graduation that I actually started learning the value of my degree in economics, and not for its application in the workplace, but because of the very pragmatic nature of the field itself. And no, I am not saying that I dust off my textbooks every now and then to run an optimization model or anything, I am saying that studying economics has given me the tools to approach decision making in a rational manner that has lead to some very real and tangible results.
Before getting to the crux of this discussion, we must first set a couple ground rules or as economists would call them, assumptions:
- We all react rationally, in an economic sense this means that given some constraint, we act in a way that maximizes our utility, or satisfaction. For example, if you are constrained to 2000 calorie a day diet, you will choose a combination of foods throughout the day that will leave you the most satisfied, all while under 2000 calories.
- There is no such thing as a free lunch. This means that for every decision you make, there will always be some sort of sacrifice, or cost. For example, your boss asks you to increase your team’s output at work by 20% — given the constraint of an 8 hour day, the 20% increase in output will come at the expense of reduced quality or team morale.

The assumption of rationality and opportunity cost will play a key role in this discussion. By now you must be thinking, ‘well of course, I always act rationally’ or ‘obviously, there is always a trade-off in whatever decisions we make.’ But not so fast, humans are prone to making skewed decisions driven by emotion and impulse, and if you don’t believe me, check out Predictably Irrational by Dan Ariely. Predictably Irrational is a book on behavioral economics which takes a look at the hidden forces that make an impact on our decision making.

But lets zoom in on these assumptions a bit more:
- You recently made an attempt to clean out your closet — but couldn’t bring yourself to part with those free t-shirts you got from that career fair two years ago. This is a common example of irrational behavior. Given a limited amount of closet space, you choose to hold on to an allocation of clothes that is not optimal. You never wear those old t-shirts and they’re practically worthless, but because you made the decision to keep the shirts out of pure emotion — you acted irrationally.
- We all have that friend who decided he or she can lead an active social life, excel in work/school, and get 8 hours of sleep each night. And we all know how it ends for this person too, they either end up collapsing due to lack of sleep, or getting fired due to a lack of focus at work or over-committing to too many social gatherings. Trade-offs exist and we must acknowledge them in our decision making.
If you take a minute to think about it, you are already well on your way to making better decisions. You have already learned that better decisions are made in the absence of emotion and you are more aware of the implicit costs of all decisions. Let’s see if we can take this a step further:
3 Questions to Aware Decision Making
1.What are the trade-offs? Next Best Alternative (NBA) or Analysis of Alternatives (AoA) is a common practice among economists and muggles alike. Whether your decision is small or large, short term or long term, taking a look at the alternatives or trade-offs will always pay dividends.
- Consider an example from my life: It was Friday night and I had just finished up with work. It had been a tiring work week and I was figuring out what to do after the gym, I decided on some Netflix. Fair enough, right? Except it had been almost a month straight of staying in on Friday night to lounge around the house. I realized I was in a serious rut. It was then that I started think about the other things I could be doing on a Friday night. Catch a movie, go out for a drink, reconnect with an old friend, the opportunities were endless. I was being irrational with my time. I knew that staying in every Friday night was not an optimal use of my time. Maybe I was a bit precluded with work or other extracurricular activities, that I just forgot to be social. After considering the alternatives, I decided to meet a friend for dinner that evening.
2. What is the expected value of events? Although the analysis can get a bit in depth, think about it on a more conceptual level. When evaluating the expected value of a decision, it is important that we are able to assign some sort of value to the benefits and costs of success and failure. See below for the breakdown:
Expected Value of Success = (probability of getting the promotion)*(benefits of promotion)Expected Value of Failure = (probability of not getting the promotion)*(cost of not getting promoted)If Expected Value of Success > Expected Value of Failure, go for the new opportunity
- Consider an example from my life: It’s been a few years since I graduated college and I have since had some pretty cool experiences working for some great companies. But something was missing — I was getting the feeling that perhaps I am capable of more, perhaps it was time to embark on something new. After weeks of feeling like I was selling myself short, I started looking in to MBA programs. Immediately, the idea of attending business school at an elite institution seemed like the missing piece to my puzzle. I went out and bought GMAT prep books and began thinking of topics for admissions essays, I was almost ‘all in.’ Except an interesting conversation with a colleague got me thinking, ‘Is an MBA really worth it?’ I mean in tangible terms, is the amount of money I am going to spend, really going to pay off? I decided to do an analysis of the expected value of success and failure. I evaluated the likelihood of getting a top dollar offer at a reputable firm post-MBA. The chances seemed pretty good. But then I thought about the likelihood of not getting that big break. What if the economy tanked again or I decided to stick to my current role? Thinking about the likelihood of failure along with the explicit costs of tuition and the implicit costs of not being able to work for two years, I decided that the MBA was not worth it.
I am not saying you pull out your calculator and start crunching numbers, but what I am saying is that this can be used as a framework for thinking through your decision. If you know the odds of getting the success are low but the potential pay out is really high — you might want to take the leap and go for that opportunity. On the other hand, if you know the odds of success are low and the benefits of the opportunity are relatively low compared to the costs — you may want to pass on that opportunity. This may be intuitive for a lot of people — but asking these key questions can help make an otherwise emotional decision, more logical.
3. Is this a high value or low value decision? And is it worth my time? The Pareto Principle or 80/20 rule states that 80% of output is driven by 20% of the input. In simple terms, 80% of our accomplishments are the direct result of about 20% of our time. Whenever you find yourself at the crossroads of a difficult decision — think about whether the decision has the potential to be a high value decision.

Consider an example from my life: I basically live and die by this rule on a daily basis. I start work every morning opening tens of emails — each generally requesting something or the other. I then start writing each request/item down on a piece of paper and continue to think about each item in terms of (1) how much time it will require to complete and (2) how much impact the item will have. Things that require a ton of time and generate very little value, fall to the bottom of the list. On the other hand, items that are relatively quick to knock out and will result in a large impact, find themselves on the top of my list.
Whether you are struggle with buyer’s remorse on a weekly basis or you have a bad case of FOMO every time you choose to stay in, making more aware decisions will always help mitigate negative outcomes. Sometimes, taking a minute to stop and think about whether you are being rational or whether you are considering all of the opportunity costs can really pay-off. I know this is something that I struggle with, a man of impulse, I oftentimes find myself in precarious situations that could have easily been avoided had I taken a minute to ask myself some of the questions I shared. Also, emotions are what make us human. Obviously no decision we ever make will be completely devoid of emotion, the idea is that if we take a more systematic and methodical approach to some of the more meaningful decisions in our lives — we can avoid having to learn things the hard way.
Originally published at amanspeaks.com on August 9, 2017.