Understanding the Trade-Offs in Your Decisions

We didn’t understand trade-offs during the pandemic, and we still don’t understand them. My fascination with trade-offs is what drives my avid listening habits around podcasts of leading economists, because they really get trade-offs (draped in the language of opportunity cost, scarcity, cost/benefit analysis, and marginal everything).

The phrase that really gets me goes something like this: “If it saves just one life, it’ll be worth it.”

No, not true. Not true at all. This is the classic “trade-off” between security and freedom. If you never want to lose a child to drowning, never let any of them swim. If you never want “even one person” to die in a car wreck, don’t have cars. But there is a real risk to driving, and so we decided, as a society, that mandatory seat belt laws, which removed some freedom from the equation, were a worthy trade-off because it saved lives without curtailing freedom to an unacceptable level. That’s a trade-off, just like insisting that your kid wear a life preserver in the community pool.

Our Trade-Offs in Business

The way you run your business is chock full of trade-offs, too. Here are some specific examples of where we don’t always see the trade-offs we’re making:

The Goal. “I don’t ever want to be too dependent on one client, and so we’re going to have 40 of them. Oh, and a few of them are really small (compared to what we’re looking for in a client now), but they’ve been around a long time, they take very little effort, and what we bill them is almost automatic.”

The trade-offs. There’s a lot of starting and stopping, profitability is more of a challenge, clients have you in a box over that length of the relationship, and you retain staff that you would otherwise not have to keep just to keep servicing those clients.

The Goal. “We want a positioning so tight that we have very few competitors. That’ll give us wide latitude to dominate the market, keep pricing high, and own this thing.”

The trade-offs. You’ll spend a fair bit of time having to educate the market on what you do, and your target market will likely be more difficult to address in the first place. And you’ll spend way too much time on LinkedIn trying to emulate those “category creation” scammers.

The Goal. “We strive for very long client relationships, and in fact we’re proud of the fact that we’re still working with two of our very first clients. We’ve even survived several changes in CMO!”

The trade-offs. The longer you have a client, the less they’ll listen and the more you’ll be a doer for them. The only variable is time. It’s also a lot harder to get an existing client to see your new capabilities than getting a new client to just assume you’re good at it.

The Goal. “Let’s be careful with our ability to respond to slow downs. I know that two to four months is typically what people call for, but let’s never go below six months, and preferably eight. I’ll sleep better at night.”

The trade-offs. You’re not going to feel much urgency, to either innovate…or trim your staffing level…or make all kinds of tough decisions.

We could do this all day. Or we could switch gears and do the personal and talk about the two ounces of rye whiskey I enjoyed last night, lovingly concocted with some homemade Szechuan peppercorn sauce and a lemon oleo citrate. It’ll take a little bit of time off my life, but I’m not sure I’d enjoy those last few days anyway. Everything is a trade-off.

Making Smart Choices

I’m not arguing that you shouldn’t do the things depicted above, but that you do not do them naively, thinking that there aren’t trade-offs in every big decision. That’s the essence of leadership, really, and you’re faced with a dozen decisions like that every day, and about a half dozen really impactful ones every month.

I really love a quote by Randolph Nesse in an appearance on EconTalk:

The body is a bundle of tradeoffs. Everything could be better but only at a cost. Your immune system could react more strongly, but at the cost of increased tissue damage. The bones in your wrist could be thick enough that you could safely skateboard without wrist guards, but then your wrist would not rotate, and you could throw a rock only half as far. You could have an eagle's ability to spot a mouse from a mile away, but only at the cost of eliminating color vision and peripheral vision. Your brain could have been bigger, but at the risk of death during birth. Your blood pressure could be lower at the cost of weaker, slower movement. You could be less sensitive to pain at the cost of being injured more often. Your stress system could be less responsive at the cost of coping less well with danger.

What a beautiful image of managed trade-offs. Go look at a beautiful photograph of the human body and think about that.

Finally

 Cost vs. quality, a team at the ready vs. efficient staffing, speed of delivery vs. customization, the customer is always right vs. hating your life.

We all make choices, and hopefully with our eyes wide open. Life and creativity are beautiful things. You good with your current trade-offs? Take a fresh look at them every so often and make sure.