The prospect of
gaining rewards - what we think we want and need - is the reason behind all of
our behaviors. All rewards are gained at a cost or an expenditure of
resources. The resources we pay to acquire rewards includes the
expenditure of time, energy, and financial cost (investment
capital). Most rewards of value to humans are not free (even
clean air now has a cost) and requires at least some cost to acquire.
For example, meeting one's economic needs for
food, clothing, and shelter are certainly not found
in nature ready for consumption but require than people take other natural
resources and convert them into useable form. The act of converting
raw resources into finished products ready for consumption to satisfy economic
needs has a cost in time, energy, or investment capital for someone. Those
who own consumable goods, in excess of their own needs, can trade or sell them
for something they don't have or money that can be stored to exchange for
economic goods later.
There are
fundamental rules that guide the human quest for the satisfaction of needs by
trading one's resource for them:.
1) More is better than less,
2) Getting what you want sooner is better than later, and
3) There is no such thing as a free lunch.
A sound
decision-rule for selecting amongst competing choices for satisfying any need is based on the human inclination
to seek opportunities that offer the most gain for the least cost.
Alternately stated, the ultimate golden rule of decision-making is to maximize
reward and minimize cost. Other good decision rules are these: 1)
For a fixed reward, spending less cost or
investment is better than more.
- A corollary to the first
decision rule: more benefit is better than less for the same cost or
investment.
2) Accept alternatives only if the reward is as
proportionately high as the cost.
3) Seek choices that have a high benefit-to-cost ratio is frequently used to screen out the better
choices.
The four quadrant matrix in Figure 1 below illustrates
those decision rules graphically. Decision choices are plotted
in the graph according to their benefits and their cost to attain those
benefits. Quadrate I contains the ideal or best
decision choices, because the benefit is high and the cost is low. On the
other hand, decision choices that plot in Quadrant IV offers the worst decision choices, because the balance
between rewards and costs are reversed - the costs are high and the benefits are
low - exactly the conditions most rational people want to avoid. Decision
choices that plot in quadrants II and III offer a commensurate balance of benefits to costs.
Those choices
whose projected benefits-to-cost lie above the diagonal arrow (blue and green
regions) are better than those that plot below it (yellow and red). Thus, for decisions with certain outcomes,
use the following guidelines in selecting between alternative (each of which partially
satisfies a decision-maker's set of needs). 1)Spend
time looking for alternatives that fall into quadrant I and accept as many of
them as you can afford. Decision choices that plot in Quadrant I are most preferred, because
they offers both
higher benefits and lower costs.
2) Accept alternatives whose benefit-to-cost ratios fall into the green
areas.
3) Generally avoid the yellow areas unless a need can not be deferred or
satisfied any other way.
4) Avoid choices from quadrant IV as there are better choices in both quadrant II and III.
Choices that fall in quadrants II and III offer choices that will
either result in higher benefits or a lower costs than alternative that plot in quadrant IV.
In a world of
uncertainty, and most decisions are uncertain to some degree, uncertainty can
represent either more cost than expected or opportunities for higher gain than
anticipated. Generally, people dislike uncertainty or risk almost as much as
they dislike cost and investment. Again, an opportunity-to-risk ratio is frequently used to screen out the better
choices. The four quadrant matrix in Figure 2 above illustrates
a corollary to the first
decision rule: more opportunity is better than less for the same risk.
Stated slightly differently, for a fixed opportunity, less risk is better than
more. Accept alternatives only if the opportunity is as
proportionately high as the risk. Quadrate I contains the ideal or best
decision choices, because the opportunity is high and the risk is low. On the
other hand, Quadrant IV offers the worst decision choices, because the balance
between opportunity and risks are reversed - the risks are high and the
opportunities are
low - exactly the conditions most rational people want to avoid. Choices
in quadrants II and III offer a commensurate balance of opportunities to risks.
Those choices above the diagonal arrow (green) are better than those below it
(yellow). Thus, for decisions with certain outcomes, the following
decision rules should guide one's decision making quest: 1)Spend
time looking for alternatives that fall into quadrant I and accept as many of
them as one can afford. Quadrant I
is most preferred, because it offers both higher opportunity and lower risk.
2) Accept alternatives whose benefit-to-cost ratios fall into the green
areas.
3) Generally avoid the yellow areas.
4) Defer or avoid alternatives the plot in quadrant IV as these decision choices are dominated by those in
both quadrant II and III. Both of these quadrants II and III offer choices that will
either result in higher opportunity or a lower risk than the alternatives that
plot in quadrant IV.
