Trading off for a better choice
If we don’t know what we really gain and what we sacrifice, how good are our choices?
It’s not clear how many believers there still are in the homo economicus, the rationally self-interested being who constantly calculates which, of all the available options, provides the maximum benefit. Probably not all that many, because this character, dubbed econ by Richard Thaler and Cass Sunstein in Nudge, turns out to be a less than accurate representation of real humans.
The idea behind it is simple and appealing, though: whenever we make a choice, we reveal a deeply held, constant preference. If this is how we divide our time or our money, then we do so because we have worked out there is no better way to do so. If we choose X over Y, then that is because we have calculated that, altogether, X is better for us than Y.
There is much that is wrong with this, but in some cases we actually do indeed use reason to determine which choice is the best. We may not always realize it, but for some decisions we use a central economic concept: the trade-off. Economics is about scarce resources, and allocating them efficiently means trading them off.
Suppose you have two job offers: one is nearby, but the wage is on the low side; the other pays really well, but is an hour’s drive from your home. Two scarce resources pop up in the choice: time, and money. To decide between the two, we need to trade off what we value more: the extra cash the distant job would bring in, or the extra time working just around the corner would give us. Modern washing machines also force us to choose between an eco-setting option, which reduces energy consumption by two-thirds but takes 2.5 hours, and one which uses the ‘normal’ amount of energy, but finishes the chore in just 50 minutes. Yep, another time versus money trade-off.
And the trade-offs we make can be quite sophisticated. Rory Sutherland, in a podcast with the Holmes Report, describes how he travels to and from the airport. Returning home, he happily follows the instructions of his satellite navigation which works out the fastest route along the motorway. But on the way to the airport, he takes control. Mindful of the risk of getting stuck on the motorway because of an accident, with no alternative route to reach the airport in time, he takes the scenic route instead. Yes, it adds 10 or 15 minutes to his journey time, but it also means there are many ways to circumvent any traffic problem on the way. He is trading off time for risk — beyond the simple utilitarian logic of the satnav, but well within the capabilities of us humans.
We don’t always choose so deliberately, though. They may not always be as extreme as the demands in this (NSFW!) old Billy Connolly routine, but plenty of decisions and choices come straight from the gut or the heart and are not necessarily well-considered. We don’t always realize that there are trade-offs to be made, and we often choose as if there is only one side of the balance that matters.
Imagine a couple (why don’t we call them Yvonne and Zac) who prefer organic meat and vegetables, and who buy them as a matter of course. They have never really calculated how much more expensive their weekly shop is, nor whether the added cost is actually a reflection of better quality. Maybe they simply believe that organic food is better, or perhaps they adopt the ‘price=quality’ heuristic: assuming more expensive is superior. The thing is, they’ve never worked out how much their preference costs them. Would Yvonne and Zac still favour organic steak and carrots if someone told them their habit costs them £5/week — more than £250 each year? What if it was actually more like £500, or £750? They’re not really making a trade-off. And that means they cannot really know whether their choice is a good one.
If, instead, they figured out how much the difference in cost actually was, they could see what else they could do with that difference, and weigh off what was the best use of that amount of money. Maybe the best use really is a year’s worth of Prince Charles’s Duchy Originals, Yeo Valley yogurt, Sainsbury’s organic carrots and the. And maybe it is not.
Only by consciously making the trade-off can they know.
Or meet Gus, who regularly drives a 15-mile round trip to a petrol station where the fuel costs 4p/litre less than near his home. That saves him £2.40 on a full tank, and gives him a warm feeling of being frugal. What would he see if he looked at what he is trading off? The 15-mile journey costs him about £1.20 in petrol alone, so his net gain is immediately halved. It also costs him about 20 minutes (exclusive of the filling up), which means he is being paid £3.60 per hour for his time, about half the national minimum wage.
Does the endeavour still make sense? That’s for Gus to decide of course, but it is equivalent to someone offering Gus to, say, make a 15-mile return trip to pick up a parcel, in return for £1.20 and the cost of his petrol. Unless the warm glow of being frugal is worth a lot to him, it doesn’t seem to be a very attractive proposition.
But only by consciously making the trade-off can he really know this.
Explicitly considering trade-offs confronts us with the reality of what we really sacrifice and gain by our choices. We may not like what doing so tells us, but if it turns out we’re not acting as wisely as we thought, at least we know why.
Should we use this device more frequently? Is it worth discovering we’re fooling ourselves, or is it better to remain ignorant? Now that’s a difficult trade-off…
Originally published at koenfucius.wordpress.com on August 26, 2016.