This happens all the time: we’re given a choice between two deals.
I’ve met some people who consistently choose the bad one.
It’s as if in every situation, they must have said, “I’ll take the bad deal!”
Some concepts that can help:
1 – Short-Term Reward vs. Long-Term Cost. When numbers (especially big numbers) are involved, don’t trust your intuition. “It just seems like…” and “This is what other people do…” aren’t solid arguments. Math it out to the end. What’s the total cost after 5 or 15 or 30 years? Example: car dealerships want you to focus on the monthly payment through financing rather than the total cost of ownership. Instead, add in ALL factors: interest, transaction costs, taxes, insurance, fuel, maintenance, depreciation. What’s that number? Probably a lot more than you expected. Good deal: buy a car you can afford with cash. Bad deal: “We’ll give you $1,000 cash right now” translates to “If you agree to lose $10,000 slowly.”
2 – Anti-Boring Bias. Are you choosing this deal because it feels more novel or stimulating? Would the more boring choice actually be better? Example: writing a clever AI app to “save time” on a task, when in reality, it would have taken far less time to do the task right now, manually. Beware of deals that are more fun.
3 – Second-Order Effects. Every choice has an effect, but those effects also have their own effects. Consider not only the immediate opportunity costs (if I do A, I can no longer do B) but also the next steps in the causal chain. Example: Australia had a problem with insects destroying sugar cane crops. They introduced a type of toad to eat the insects. Bad news: not only did the toads NOT eat the insects, the toads were poisonous and killed other species. They’ve become invasive and impossible to stop.
4 – Best-Case Budgeting. Does the “Good Deal” only work if nothing goes wrong? Oops! Things go wrong. Examples: “If my variable interest rate mortgage stays low…” or “If my tenants pay me every month…” or “when Elon Musk sends me my Universal Basic Income…”
5 – It’s A Trap! Like a shrimp on a fishing hook, a bad deal must pretend to be a good deal. The shortcut here: be skeptical of the deal that appears most attractive.
Of course, it depends on what we are optimizing for.
Related: What Is A Good Decision?