Quote from James Sule on August 17, 2020, 7:54 AM

If you wish to get the best out of life by always making the right decisions, then you’re in luck with this piece. 

Decisions are a natural outcome of any analysis that compares benefits and costs: the analysis may be mental or written, or a combination of both.

All decisions, whether direct or indirect, private or public, immediate or long-term, legitimate or illegitimate, are made based on cost-benefit ratio analyses, and in comparison to the value 1, the smaller this ratio, the better the decision.

Imagine that your friend has approached you with a deal: to exchange your fifteen dollars with their five dollars; by accepting, you are sure to get the short end of the stick: the ratio of the cost of the deal to the benefit is 3 (i.e. 15/5). That was a bad decision: it cost you more – as revealed by the size of the ratio. In contrast with your friend; however, they made a good decision since the ratio, 0.33 (i.e. 5/15), is smaller than 1.

The deal referred to above is quite simplistic: it disregarded an important variable called time; nevertheless, the principle of cost-benefit ratio forms the foundation for all decision making processes.

It is strange to know that political decisions – often perceived as arbitrary actions – follow this same ratio, although with a slight difference in the parameters used for computing them. For most underdeveloped nations whose governments are unpopular for reckless spending, the ratio is often got by dividing the large scale economic cost – to the public – with the narrow benefit of the politician. Yet that is to be expected: our natural disposition is to spend more when we bear no cost.

Anyway, whatever the case may be, I am yet to meet a person who continues to make decisions that come at a personal cost higher than the benefits. Instead, I've met several others, myself inclusive, that erroneously denominate all cost in monetary terms.

A possible justification for this error is ignorance: either genuine or brought about by any calculated effort to conceal useful information from an unsuspecting party – a likely occurrence in employer-employee relationships. Regardless, we run afoul of good decision-making when we wrongly valuate the cost of our transactions.

This article aims at improving our decision-making through the following objectives:  to highlight some obscure forms of cost; and to call attention to more ways for denominating cost.

We shall start with a failure to recognize a somewhat intangible cost called opportunity cost: it is so elusive, accounting book-keeping does not reflect it.

 

Opportunity Cost

Opportunity cost is simply a cost you incur for going with a first decision while leaving out an alternate decision. It is best understood with examples.

Recently, my wife asked me to accompany her to the market. Her request is understandable; the drive to and fro is long and lonely. I declined: I intended to finish up with a personal task at hand. So, after many appeals from my side, she went alone.

While she was away, I finished the task and decided to clean our bathroom. When she returned and saw what I had done in the bathroom, it brought a smile to her face. It was as though she muttered: “glad you stayed back home”.

For my wife, the potential cost of me accompanying her is the chores that would be left undone when we return. That is her opportunity cost, and it is so because cleaning the bathroom was her pre-agreed cost, not mine. My role is doing dishes and fixing things. And of course, watching soccer (on a lighter note).

The above instance has two key lessons: first, resources – in this case, time – can be used for more than one purpose; second, whatever we decide to use it for, denies us the ability to re-use it for something else.

Currently, the world is on a break: COVID-19 has made sure of that. Now, for the sake of argument, let’s assume that the lockdown lasted for eight months. And then assume I decided to binge-watch my favorite television series throughout the period. What do you think will be the opportunity cost of my decision?

The cost is hardly seen at the time of decision-making; thus, all that needed to happen to clue me in, was a visit with my friend, once the lockdown was lifted.

If during my visit, I got to know he plays the guitar as a skill he picked up while in lockdown, the missed opportunity in my decision to watch TV will come staring me in the face. My first question will be: “What did I do with the lockdown?”.

Opportunity cost is obscure: you are likely to omit it if untrained.

The same self-recrimination occurs if, instead of time, we were both given equal sums of money: and I am struggling to recall how I spent mine, especially if I see the returns of their investment with their share. We are never fully aware of the cost of our decisions from the outset. Therefore, making decisions that take cognizance of the alternative use of our resources is a powerful skill to possess.

Unlevelized Cost

In optimal decision-making, another pitfall to watch out for is an omission of time-dependent variables: because when we make decisions with insufficient variables, we are likely to end up with a bad one.

Energy decisions apply the concept of the Levelized Cost of Energy to capture more variables. But we shall skip the details since it is beyond the scope of this article. Nevertheless, the basic idea is this: for us to make better investment decisions, we must factor in the operational or maintenance cost with the initial capital investment.

In other words, the decision to buy a car should not be based solely on the price of the car, but also the fueling requirement over time. Thus, the question begs to be asked: based on cost, what car should you or should you not buy?  Should it be the one going for $6000, and estimated to consume $5000 worth of fuel, for 5 years; or the other: going for $4000, and estimated to consume $10000 worth of fuel in the same period? We get the idea as we add more variables to the equation.

 

The decision of the United States’ government to invade Afghanistan was political, and practical in the short-run. In the long-run, with time factored in, it was an economic blunder that costs the citizens a whopping $2 trillion at least. Although that should not come as a surprise: the time-scales for political and economic decisions are different. When an incompetent politician comes in and makes a reprehensible decision – within their political time-scale of four years – the masses stay back to face the economic consequences – on a longer time-scale of almost twenty years.

This sub-optimal pattern of decision-making is cross-cultural: in many states in Nigeria, contracts for road constructions are awarded within the short time-scale of the politician’s tenure, while the citizens are left with the long-term economic hardship from poor quality, impassable roads.

A good number of middle-class workers in Nigeria commit similar errors. Some spend a combined six hours –at the expense of family time – commuting daily between a remote accommodation and the office: a likely option when your only consideration is the initial cost of the rent.  Others buy a jalopy –sold at giveaway price– in a bid to own a car and then wake up to discover their entanglement with an albatross.

Admittedly, I understand that some cases are unique; notwithstanding, we stand to lose less when we factor in as many variables as possible in decision-making, regardless of our situation. The fact is this: it is cheap to spend money on the durability of goods and services  – even if it is in educating your child, the returns of a competitive education will defray the initial investment, and leave you with so much more.

Other key investment considerations for decision-making, worth mentioning, are the Net-Present Value and Internal Rate of Return. But as with the Levelized Cost of Energy, they are both beyond the scope of this article.

Now that we have dealt with a few types of obscure costs, we can now focus our attention on cost denominations.

Health

It is quite a surprise that despite our technological advancement, we fail, repeatedly, in our estimation of the worth of human health – even the most cautious amongst us, fall short in this regard. To be fair, the fault is not entirely ours to bear: the natural law of scarcity takes a portion of the blame.

The value of an entity is correlated with scarcity, such that when it becomes less scarce, we value it less, taking it for granted. It is the same way we take for granted familial love or freedom, or sunlight, or water, or air – it happens when things come in abundance.

The listed entities above, are the basic requirements for life: from which other things can be produced to enrich it. The veracity of this claim is tenable and evidenced by rare moments of indisposition: for then are we reminded by pain, that health is wealth.

Of course, the real challenge is how to constantly live in the consciousness that money is not more important than these things: to valuate money over them, is to extend the argument that money can buy life, which is false.

A couple of years ago, I was fighting for my life in the hospital; I spent 35days lying on my back, in complete reliance on the benevolence of my dear wife. I'd gone in with a litany of care on my mind, but as time passed by, I just wanted to be alive.

By whatever stretch of the imagination, no one – except my wife – could conceive the idea that I will survive, or let alone, go on to earn a second degree. Oh, yes! That was what happened.  The fact remains: we can only speak of potential when we have life. And there is no upper limit to what is possible afterward.

Next time, when you are faced with a decision that compares your health with money, I hope you remember it is a no-brainer. Indeed, a living dog is better than a dead lion.

To be clear, I quite understand that taking risks is a necessary part of our exploration of the world around us. What I can't comprehend is the level of greed that warrants jeopardizing the lives of others. Anyone that is exposed to high occupational risk should be compensated accordingly: for even the business world is built on the high-risk-high-return and low-risk-low-return model. Why should labour be any different?

 

Trust

Trust is an unusual resource that forms the bedrock of all types of trade. It towers above competence – only subordinated to health. At the highest level of public and corporate governance, the leaders are no more looking for competent people as much as they seek trustworthy and loyal associates – it is that important.

It is equally as important to be perceived as trustworthy with no hard proof. Perhaps a possible explanation for why America chose a novice in Donald Trump over an experienced Hilary Clinton; or why Nigeria chose a Muhammadu Buhari over an Atiku Abubakar despite the latter’s intimidating resume: fitting for the office. Trustworthiness is never overrated.

More so, it is hardly the case that the villain of a blockbuster movie is incompetent; instead, it is always the case that they are unethical, hence the widespread distrust in them.

Oddly enough, our default action is to first give trust to the other party, until we are disappointed: we are willing to upload our personal ‘stuff’ onto a new mobile application; we expect the table-water from the store to be healthful; for online purchases, we make payments ahead of deliveries; we take lifelong marital vows with total strangers – 6months of courtship seems rather small in comparison to 22years of growing up and forming of lifelong habits.

Unfortunately, trust suffers from the same challenge that confronts health: our ease in trusting others can be the very reason for abuse. Yet, trust, if broken cannot be redeemed by rebranding. To think otherwise is to reveal our lack of awareness of history – Lance Armstrong and O.J Simpson are all too fresh for anyone to miss it.

The point is this, decisions that erode our trustworthiness are costing us more than we realize: notwithstanding the amount of cash we make from them. It is helpful to remember: a good name is to be chosen rather than great riches.

 

Final Thoughts

The arguments above are not exhaustive: cost means different things to different people; neither should they be misconstrued to imply that I am altruistic: I have my failings. I have put forth this piece to point out the unhealthy and misinformed notion of chasing money at the expense of all else.

At this point, it is clear that a producer is greater than the product: the individual is the producer while money is the product – a healthy, well-trained individual has the competence to create value that can be exchanged for money. An understanding of this relationship equips us with options to walk away from costly transactions. To kill the goose that lays the eggs does not reflect much wisdom when tomorrow comes.

Decision-making is on a cost-benefit analysis: let us do well to check for the full cost of an expedient decision before following through with it. Finally, optimal decision-making is not for everyone: it is for those with limited resources – time, energy, food, or money.

 

P.S. I never thought you’ll make it to the end. But now that you did, I’m sure you can go an additional sixty seconds.

The costs discussed in this article have limited consequences: they cease to be an issue for you when you are dead. In contrast,  the cost of losing one’s soul is longer-lasting –the consequences are eternal.

The concept of the afterlife may continue to be a subject of intense debate, but as brilliantly remarked by Jordan Peterson, pain argues for itself when the time comes. Be wise!