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.

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