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A tool for making hard decisions
Tuesday, 16 January 2007
Life, in case you haven't noticed yet, isn't always simple. All sorts of choices confront us in our everyday existence - from the big and life changing, to the small and mundane.
Often the right choice in any situation isn't clear at all, and people can struggle to find their way through the complexity. Even deciding to do nothing is a choice, even if it's one that doesn't require much action.
If you're really stuck on some decision, there is a branch of mathematics that can help. It's called utility functions and is a component of game theory. It sounds complicated, but is actually pretty simple. At least there is a simple way of doing it if you cut out the more complex branches of the theory.
You can have a reasonable shot at it using a calculator. All you have to figure out is what the good or bad outcome of each path is worth to you, and what the likelihood of each outcome is. The simplest way to explain is to give you an example.
Let's say that you're unemployed and looking for a job. On the same day, you get offered two jobs, both of which have benefits. One of them is well paid, but doesn't have a clear path for career progression. The other is paid much less, but involves a lot of training and a clear career path. Ultimately, you'd like to move into management.
Which job should you choose?
The first thing to do is put a number figure on the benefits of each job. You can use any scale you like to do this, but between zero and a thousand is a good way.
So let's say the pay of the first job is worth +750 to you, because you have a few debts and it's guaranteed money in your pocket. But the pay of the second job is only worth +400 to you because it will barely be enough to cover your living expenses, at least for the first year.
Next, let's say the career opportunities in the first job are worth +100 to you. You will get some opportunity, but the path isn't clear and you haven't heard anything about any training. But the career opportunities of the second job are worth +400 to you, because you will receive training and a mentor to guide you up the company ranks.
Okay, so the first job is worth a total of +850 and the second job is worth +800. Now we have to work out the likelihood of our ultimate goal of moving into management. Let's say in the first job, we feel there's a 50% chance of that happening and a 70% chance in the second job.
So we take our +850 for the first job and multiply it by 50% which leaves us with a total of +425. We take our +800 for the second job and multiply it by 70%, leaving a total of +560. The outcome is that the second job is the better choice.
Of course, these figures are all just guesses and estimates and we can never be sure of the actual outcome. But putting a numerical figure on the various likelihoods and benefits can make us more comfortable in our decisions.
You can also use this method to compare bad choices. Say you are deciding whether to declare bankruptcy, or put effort into paying off your debts. You could put a negative value on each method, say -800 for the first and -500 for the second, and then multiply them by the likelihood of the outcome of rebuilding your finances.
Utility functions are a useful tool for taking a cold, hard look at your decisions. They can help you make a choice when the best path isn't clear. Try them, the next time you are facing a tough dilemma.
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