Decision Costs

Decision Costs

Decision Costs Jonathan Poland

Decision costs refer to the costs associated with making a decision. These costs can take many forms, including the time and effort spent researching and analyzing options, the opportunity cost of not choosing an alternative option, and the potential risks and consequences of making a particular decision. Decision costs can also include the resources and funds that are required to implement a decision, such as the cost of hiring new employees or purchasing new equipment. In general, decision costs refer to the various costs and consequences that must be considered when making a decision.

Information Costs

The costs of researching a decision. For example, a musician who spends 35 hours learning about synthesizers before purchasing one.

Search Costs

The cost of finding what you need. For example, a musician who spends 7 hours developing a shortlist of synthesizers that meet their requirements.

Cost of Decision Making

The end-to-end cost of decision making. For example, a large organization that uses 2,200 person hours to pick a new corporate logo.

Decision Avoidance

Avoiding a decision that needs to be made. This can result in no decision at all such that the default occurs. For example, a manager who avoids a decision on how to discipline an employee such that the employee continues with their poor behavior unchecked.

Due Diligence

Due diligence is the required level of analysis required of a professional. For example, the basic expectation that a real estate agent has done enough research and validations to protect their client from fraud.

Decision Failure

Investing in a decision making process that fails to make a decision. This is a failure and shouldn’t be confused with a decision to do nothing which is often a reasonable decision.

Sunk Costs

Sunk costs are costs that have already been spent such that they aren’t recoverable. In the case of decision costs, an increasingly expensive decision process can be viewed as a sunk cost. People tend to be irrational about sunk costs. For example, they may continue with a flawed decision making process that is destined to fail because they feel that if the process is ended the sunk costs will go to waste. In reality, the sunk costs may have already gone to waste and the continuation of the decision process is making this worse and worse.

Delay Costs

The costs that run up as you fail to make a decision in a timely manner. For example, a hotel that is rapidly loosing staff that takes many months to decide how to improve employee retention. In this time, more staff may leave leading to operational disruptions, lost revenue and customer service failures.

Overthinking

Overthinking occurs where the effort spent in thinking about something isn’t likely to improve results. For example, if you spend 13 hours thinking about whether you want a white or black mobile device where both are equally unattractive.

Decision Fatigue

Decision fatigue is a decline in mental performance due to an intense or prolonged decision making process. Ironically, this can result in poor decisions due to excessive effort. For example, a consumer who drives themself to decision fatigue comparing bicycles who then makes a bad choice because they are exhausted and stressed.

Overchoice

Overchoice is a situation where people are less happy because of the large number of choices they are given. This can be examined at the level of a society where people may be quite unhappy despite freedom and variety that give them great power to make decisions in their life. Overchoice theory also has implications for marketing whereby customers become dissatisfied or avoid your offers because they are too complex a decision. For example, a telecom with unbelievably complex pricing and contract options that loses business to a firm that offers simple and comprehensible plans that involve fewer decisions.

Dealing With Ambiguity

Decision costs often inflate because people attempt to avoid ambiguity. For example, a hiring manager who overthinks a hiring decision because all three candidates gave a vague answer to an interview question. This could result in all three candidates going on to other offers and the hiring process being extended to many months or years.

Satisficing

Satisficing is a pragmatic approach to decision making that chooses an option that is “good enough” or “somewhat reasonable” in order to avoid the delays and costs of making a more optimized decision. For example, an employee who quits their job to pursue education based on the rationale that they only have one life and should live their greater dreams.

Last Responsible Moment

Last responsible moment is the practice of deferring decisions until they really need to be made. This should not be confused with decision avoidance. Last responsible moment can be quite rational as it can reduce decision costs and increase the amount of information available at decision time. For example, an IT team that only plans their work out a month in advance in order to always be working on their best ideas and the organization’s current priorities.

Learn More
What is an Exit Interview? Jonathan Poland

What is an Exit Interview?

An exit interview is a formal meeting or conversation that takes place when an employee is leaving an organization, regardless…

Waste is Food Jonathan Poland

Waste is Food

The concept of “waste is food” is based on the idea that an industrial economy should not produce any waste except for biological nutrients that can be safely returned to the environment.

Leadership Development Jonathan Poland

Leadership Development

Leadership development is the process of helping employees develop the necessary skills and competencies to take on leadership roles within…

Process Efficiency Jonathan Poland

Process Efficiency

Process efficiency refers to the effectiveness of a process in achieving its intended outcomes, while minimizing waste and inefficiency. A…

Examples of Capital Intensive Jonathan Poland

Examples of Capital Intensive

An industry, organization, or activity that is capital intensive requires a large amount of fixed capital, such as buildings and…

Integration Risk Jonathan Poland

Integration Risk

Integration risk is a type of risk that arises when two or more entities, such as businesses, systems, or processes,…

Geographic Segmentation Jonathan Poland

Geographic Segmentation

Geographic segmentation is a marketing strategy that involves dividing a target market into smaller groups based on geographical characteristics such…

Praxeology Jonathan Poland

Praxeology

Praxeology is the study of human action, particularly as it pertains to decision-making and the pursuit of goals. The term…

Complexity Cost Jonathan Poland

Complexity Cost

Complexity cost is the cost associated with making something more complex. Complexity can have a range of costs, including increased…

Content Database

Search over 1,000 posts on topics across
business, finance, and capital markets.

Business Objectives Jonathan Poland

Business Objectives

Business objectives are specific targets or goals that an organization, team, or individual strives to achieve within a certain time…

Overchoice Jonathan Poland

Overchoice

Overchoice, also known as the “paradox of choice,” is a phenomenon in which having too many options or choices can…

What is the Iterative Process? Jonathan Poland

What is the Iterative Process?

An iterative process is a method of working through a problem or project by repeating a series of steps, each…

What is a Persona? Jonathan Poland

What is a Persona?

Personas are fictional characters that businesses use to represent and model the characteristics, goals, needs, behaviors, and emotions of their…

Risk Management Techniques Jonathan Poland

Risk Management Techniques

Risk management is the process of identifying, assessing, and prioritizing risks in order to minimize their potential impact on an…

Call To Action Jonathan Poland

Call To Action

A call to action (CTA) is a phrase or statement that is used to encourage a specific response or action…

Systematic Risk Jonathan Poland

Systematic Risk

Systemic risk is the risk that a problem in one part of the financial system will have broader impacts on…

Abundance Mentality Jonathan Poland

Abundance Mentality

Abundance mentality is the belief that there is enough for everyone and that abundance, rather than scarcity, is the natural…

Experience Economy Jonathan Poland

Experience Economy

The concept of the experience economy suggests that companies can differentiate themselves and gain a competitive advantage by creating memorable…