Which is Better, A Big Mac or 2 Cheeseburgers?
How we tend to optimise micro-financial decisions, but often fail to get the upper hand in the big deals of life.
Do you know of someone who is always trying to get the best deal at McDonald’s? A person that wants to choose the combination of items that will result in the highest quantity of food for the lowest price.
Do you know of someone who brings plastic bags from home to the supermarket to save a few pennies and help the environment?
Do you know of someone that vigorously insists on closing the tap in the bathroom sink whilst brushing teeth in order to save water?
The above are some of the many examples of how we tend to optimise micro-financial decisions. These situations are common, and it’s possible to save money and make the world a better place with many small actions.
Unfortunately, being great with small decisions doesn’t guarantee you’ll succeed when facing those one-off big decision of life:
Do you know of someone that has entered a mortgage with financial conditions that are asphyxiating? Maybe committing for 20–30 years?
Do you know of someone that has rushed into marrying the wrong person, and has regretted the decision for decades?
Do you know of someone who has sold his startup company for a very low valuation? When perhaps much more money was attainable?
Why is it that small frequent decisions are easy, but unfrequent large ones are hard? I believe two notions are crucial: the magnitude of the deals, and our negotiation experience in the field. Let me explain.
1. Magnitude and scale
We humans are terrible at estimating and considering the relevant scale of alternatives, specially when they differ dramatically in magnitude.
For example, it’s easy to compare a big apple with a small apple; but it’s hard to comprehend the difference in size between an atom and the galaxy.
When facing any decision that involves numbers, we like to see ourselves as logical thinkers. However, research shows that emotion frequently plays a major role in how we make choices — often leading to sub-optimal results.
For instance, we don’t want to waste water. Hence, when brushing your teeth you can close the tap to save some water. However, how much are you saving via this act? The answer is not much — 0.7 litres on average.
Compare brushing your teeth with having a shower. The average shower lasting around 8 minutes consumes around 70 litres of water. This is 100 times more water used than leaving the tap open whilst brushing your teeth!
Assuming you brush your teeth and shower daily (I hope you do) you should bear in mind that reducing your showering time by just 10 seconds saves more water than closing the tap when brushing your teeth.
Consequently, skipping one shower is more effective 99 sessions of brushing your teeth leaving the tap open if you want to save water. A unique action carries more value than the aggregate of 99 small ones.
Don’t get me wrong. It all counts, but it counts differently in terms of magnitude.
Hope this gives you a sense of scale and magnitude. Life can be extremely non-linear, with one-off decisions that matter a billion times more than daily small ones. Let’s evaluate the role of experience in big decisions next.
2. Experience imbalance in negotiations
Have you ever negotiated with a kid? A kid has little experience, hence can be easily taken advantage of (if you are a terrible person). When two people negotiate, experience and knowledge are crucial in obtaining the best deal.
Buying at McDonald’s or at the supermarket are common situations. For that reason, it’s easy to develop experience and improve at finding the best deal available. However, how many times have you bought a house?
Most people can only afford to buy one home in their lifetime. However, the real state agent selling to them may be a seasoned professional with 20 years experience in selling. Are you sure you can get a good deal in your first try?
Let’s draft some numbers. Let’s assume you live in London and make £50,000 a year (£36,000 after tax). This means you take home around £3,000 per month. Now imagine you want to buy a home for £500,000 by commiting £1,500 per month to it (28 years). This is a big decision.
In the above example, finding a similar home that costs 10% less means 3 less years of payments. This simple example doesn’t include interest rates, but similarly, a 1% reduction in the rate can save you years of work too.
In the above example, spending a couple of weeks researching to get a slightly better deal could save you 3 years. If it is the first time you’re taking a big decision of certain kind, it’s just sensible to educate yourself first.
Some patience and effort now can save you far more later.
So which burger combination is better?
The answer is that it doesn’t matter. To make the best of life, it’s not enough to save pennies by getting the best deals at McDonald’s. Small decisions count, but the real deal is to nail those once-in-a-lifetime opportunities.
In accordance to this philosophy, I recommend taking two things into account when facing a big decision for the first time:
- How big is this choice in comparison with what I’m used to?
- How much time should I think/research before committing?
Just realise that buying a house can be 250,000 times bigger a decision than buying a Big Mac. Because of this dramatic change in scale, the approach we follow needs to be much more serious and thorough.
I hope these little examples of small and big decisions provide you with some valuable insights. Life is difficult, and it’s not easy to always make the right choices. When in doubt, simply remember the golden rule:
Focus first on big decisions. Leave the rest for later.
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