Making the right decisions can be difficult, and everyone has their own process for decision-making. In this post, we'll look at 7 factors that impact every decision you make, from reversal cost and security versus freedom to opportunity cost and external validation. We'll also explore internal fulfillment, and how seeking external validation can lead to loose boundaries and resentment. By understanding these factors, you can become a better decision-maker and maximize your chances of making the right decisions.
1. Opportunity Cost
Opportunity cost is a key concept in economics. It is the cost of any activity measured in terms of the value of the next best alternative foregone (that is not chosen). For example, if you choose to buy a car, the opportunity cost is the money you could have used to buy something else.
Every decision you make in your life has an opportunity cost. You'll give up one thing for something else.
The opportunity cost of risk increases in proportion to responsibilities. Your capacity for risk when you're old will inevitably decrease. If you are married or have kids, you have more obligations and responsibilities. Your capacity for physical risk will also decline with age. Take your biggest risks in life before you take on the biggest responsibilities.
You can estimate the opportunity cost of a decision by asking yourself what you're giving up in exchange for getting something you want. As Emile Hirsch said in the movie The Girl Next Door, "the juice is worth the squeeze" if the cost of the decision is outweighed by the potential benefits.
2. Reversal Cost
Reversal cost is a term that Annie Duke uses to define the cost of changing a decision. And it is another factor to consider whenever you make a decision.
Decisions with low reversal costs are ones where the cost of changing your mind is low. Examples include ordering a meal at a restaurant or going on a date with someone you're not compatible with. The reversal cost of marrying the wrong person is the money you'll spend on a divorce attorney and the opportunity cost of time that you could have spent finding the right person to marry. Buying a house you can't afford could force you to declare bankruptcy.
The reversal cost of marrying the wrong person is the money you'll spend on a divorce attorney and the opportunity cost of time that you could have spent finding the right person to marry. Buying a house you can't afford could force you to declare bankruptcy.
What makes decisions with high reversal costs challenging is that they are wild problems—a fork in the road of life where knowing which path is the right one isn't obvious, where the pleasure and pain from choosing one path over another are ultimately hidden from us, and where the path we choose defines who we are and who we might become.
Love defeats logic for relationship decisions. So it's easy to overlook the reversal costs of choosing the wrong person as a long-term partner. The reason that these decisions are so important is that it's incredibly costly to change your mind.
To complicate the matter, all decisions in life are made with incomplete information. You can't ever see seven steps ahead and it's inevitable that we'll make some decisions we regret. However, regret allows us to learn from the past and make better decisions in the future.
Take your time with decisions that have a high cost of changing your mind, and make quick decisions with a low cost of changing your mind.
3. Second and Third Order Consequences
Every decision has multiple consequences. Most people only look at the immediate outcome of the decisions, which are first-order consequences.
Second-order consequences of your decisions. These are the consequences that are further down the line and are often overlooked. They include the long-term impact on your career, relationships, and overall life. It's important to consider the long-term potential and opportunity cost of your decisions.
Third-order consequences are the long-term, indirect consequences of a decision that can be difficult to anticipate. These consequences can include changes in relationships, career paths, and life circumstances. For example, if you decide to take a job that requires you to move to a different city, the third-order consequence could be the strain on your relationships with family and friends due to the distance. Or if you decide to start a business, the third-order consequence could be the financial stability you gain from having a steady income.
The key to making better decisions is to consider as many potential future consequences as possible, both positive and negative.
Taking the time to think through the long-term implications of a decision will help you make choices that are more aligned with your values and long-term goals.
4. Security vs Freedom
Every choice in life is a tradeoff between freedom and security.
You choose between the security of a relationship and the freedom of being single, the security of a steady paycheck, and the freedom of being an entrepreneur.
And regardless of the choice you make, there will always be an opportunity cost. When you say yes to one thing, you say no to something else. To get something you want, you give up something you have.
5. Cost Minimization versus Possibility Maximization
According to Paul Millerd, you can minimize cost or maximize possibility. But there's always a limit to how much you can minimize costs.
When you maximize possibility, you focus on a range of possible outcomes instead of a goal. This allows you to explore a wider range of options and be open to new opportunities. You also have the potential to gain more than what you initially expected if you take the time to explore different possibilities.
However, it's important to remember that there are still limitations and boundaries to what you can achieve. Acknowledging these limitations can help you capitalize on your strengths and maximize the potential of your decisions.
6. External Validation
External validation comes in many forms. But if you're not aware of the fact that Ego Is the Enemy you'll become addicted to validation.
A status is a form of external validation.
Like it or not, we are all part of a status hierarchy. And everything you do, say, and own is a status signal. And part of the reason we all engage in status signaling is that we're looking for validation. You might think it's superficial to crave status, but it's a fundamental need and status implicates all our other desires. The reason we seek it is that external validation increases status.
When an author publishes a New York Times Bestseller, his or her position on the status ladder changes. This is because accomplishing this type of goal leads to the accumulation of capital (economic, social, cultural, and educational). When your position on the status ladder changes, it creates opportunities you didn't have before.
The internet is the ultimate validation-seeking machine. "Social media is about more than just appearance. It's also a deeply neoliberal product that has gamified the self, turning our identity into a pawn that plays competitively on digital platforms for likes, feedback, and friends—the approval of the tribes" says Will Storr in his book, Selfie: How We Became so Self Obsessed and What It's Doing to Us
Everyone is motivated by money to a degree. Wealth is a form of external validation, but it's important to remember that money can't buy you happiness. Money is a means to an end, not an end in itself. Money can help you buy experiences and access opportunities, but it can't buy you fulfillment. Money increases your status.
Regardless of how much you receive, the diminishing returns of external validation make it difficult to receive the lasting satisfaction and fulfillment we crave.
7. Internal Fulfillment
When making decisions, it's important to remember that your emotional runway needs to be as long as your financial one. Even if a decision might lead to more money in the short term, you need to consider the long-term impact of the decision and how it will affect your happiness and fulfillment.
It's also important to measure the metrics that matter. While it's easy to quantify the ROI of a decision in terms of money, it's much harder to quantify the ROI of time well spent. When making a decision, it's important to consider the non-monetary costs and benefits, such as the impact it will have on your mental health, relationships, and overall well-being.
Ultimately, the best decisions are ones that are driven by both opinions and data.
When making decisions, it's important to consider the non-monetary costs and benefits, such as the impact they will have on your mental health, relationships, and overall well-being. It's also important to measure the metrics that matter, not just the ones that are easy to quantify.
While it's easy to quantify the ROI of a decision in terms of money, it's much harder to quantify the ROI of time well spent. The best decisions are ones that are driven by both opinions and data, and it's important to consider the cost of reversing a decision. For decisions with low reversal costs, it's often wise to go with your gut and trust your intuition. For decisions with high reversal costs, it's important to be more deliberate and take your time to weigh all the pros and cons.