How our lives are shaped by the choices we make

Source: smartholistics.com.uk
LIFE DOESN’T JUST HAPPEN

Ever since Adam and Eve’s original decision to eat fruit from the forbidden tree in the Garden of Eden, humans have made some spectacularly poor choices. History bears witness to these monumental mistakes including the crew of the Titanic ignoring warnings of icebergs in their path, NASA proceeding with the space shuttle Challenger launch despite known problems with the solid rocket boosters, and engineers filling the Hindenburg with highly flammable hydrogen.

Bad decisions are part of life, though most do not have consequences that weigh as heavily as those just cited. Examples of non-fatal, flawed judgements include the 12 publishers who rejected J.K. Rowling’s first Harry Potter manuscript, the Decca Records executive who declined to sign The Beatles, and the Yahoo co-founder who turned down a US$44 billion takeover offer from Microsoft.

Hindsight may be 20/20, but risk is an inescapable part of every decision. We never know the outcome of a decision in advance – sometimes our choices turn out to be spot on, while on other occasions our judgments prove to be seriously flawed. In the words of the late French philosopher, Albert Camus, “life is the sum of all our choices”. History, by extrapolation, equals the accumulated choices of all mankind.

Our lives are defined by the series of choices we make every single day. They play out over a lifetime and ultimately determine our destiny. Our choices not only change our lives but the lives of others. We are not alone in our choices as we are part of a bigger picture – there is a chain of events associated with every decision we make. Thus, an individual deciding to buy environmentally friendly products can help change the world and make it a better place for everyone.

Some of the life-changing decisions that we make include where to live, how many children to have, and what career to follow. More mundane and routine choices include what to wear, and what to watch on Netflix. One of the paradoxes of life is that our bigger decisions are often less calculated than our smaller ones. We can agonise for weeks over what new car to buy but rapidly end a long-term relationship with little thought or deliberation.

Sometimes a snap judgment or instinctive choice is appropriate. Your emotions, though, can easily cloud your judgment, which is why most experts agree that the best decisions are made when there is a balance between logic and emotions. The invisible tug-o-war between the head and the heart is not a bad thing as you are more likely to carefully weigh the pros and cons of each decision before choosing an alternative.

When your emotions are running high, your logic will be low, which can lead to irrational decisions. To illustrate, anger makes you vulnerable to high-risk, low payoff choices such as the rash decisions made during a bitter divorce. Happiness, on the other hand, makes you confident and optimistic about the future but can cause you to overestimate your chances of success, such as believing that your winning streak at the casino will continue indefinitely (aka gambler’s fallacy).

Knowing how to make good decisions is one of the most important skills we can possess. Many people look back at some of the terrible decisions they have made and ask themselves: What was I thinking? We make endless decisions, so we are bound to regret some of them. A Cornell University study estimated that the average adult makes thousands of remotely conscious decisions every day.

Each decision you make is a trade-off as everything you say, do, or pursue has a cost and a benefit. In the language of economists, this trade-off is called an opportunity cost. The term “opportunity cost” is defined as “the cost of an alternative that must be forgone in order to pursue a certain action”. Put simply, it’s what a person sacrifices when they choose one option over another. An example will help here.

Let’s say that you have $100 in your purse and you can spend it on a pair of jeans or a meal. You choose to buy the denim jeans, so the opportunity cost is the restaurant meal you cannot afford. For everything you choose to do, there’s something else you won’t be able to do. Every day as consumers, we are forced to make such choices due to “scarcity”. Scarcity and opportunity cost are two interlinking economic concepts.

Economists view the world through the lens of scarcity. Indeed, without scarcity, the science of economics would not exist. Scarcity arises because, as a society, we have unlimited wants but limited resources. We all know that you can’t have everything you want – we have to choose and make trade-offs. Economics examines how individuals, businesses, and governments deal with the limitations imposed by scarcity.

Broadly speaking, economics is the study of human behaviour as it relates to money. When it comes to financial decisions, economists erroneously claim that humans are rational and unemotional decision makers. Psychologists, on the other hand, correctly contend that economists’ models bear little relationship to actual human behaviour. The harsh reality is that humans do not obey the efficient, orderly principals espoused by free-market thinkers.

The Global Financial Crisis (GFC) confirmed that we are far too emotive for rational economic models to accurately predict our conduct. Many people in the US bought houses at grossly inflated prices and expected their value to keep rising. In the process, borrowers saddled themselves with loans that they could not afford, which led to the subprime mortgage meltdown and ultimately the catastrophic GFC.

This “irrational exuberance” was not confined to the household sector. Borrowers, bankers, and brokers were united in the delusional belief that house prices never go south. Post-GFC, many people turned to behavioural economics to understand what happened. Behavioural economics combines psychology and economics to explain how people really make decisions when they spend, invest, save, and borrow.

Unsurprisingly, few people reach the level of expertise necessary to rightfully claim that they are an expert decision-maker. The development of genuine expertise in any field requires years of struggle and sacrifice. Still, you can be a good decision-maker if you choose actions that produce the best outcome for yourself and others. The trick is to make each decision with an open mind and be aware of your unconscious biases.

Cognitive biases distort thinking, influence beliefs, and sway the decisions we make every day, yet most people are unaware of them. Over the course of our lives, we all develop cognitive biases. Just watch the daily news, listen to talkback radio, or scroll through social media posts to witness biases in action as people argue over politics, climate change, and other hot topics. Everyone, of course, claims that their position is the right one.

Differences of opinion occur because we all have our own perspectives based on our preconceptions, past experiences, and the information we draw on in forming judgements. When it comes to gathering information, many of us are guilty of confirmation bias – readily embracing information and conclusions which align with our views and largely ignoring anything which contradicts our beliefs.

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The next time that you make a bad decision, just remember that it could have been worse. Imagine being the individual responsible for allowing the famous Trojan Horse to be brought inside the City of Troy, not realising it was full of Greek soldiers. And how would you have felt standing in Napoleon’s shoes after he invaded Russia, suffered a catastrophic defeat, and returned home with just a fraction of his once grand army?

You can minimise regrettable decisions by learning from your mistakes – history does not have to repeat itself. Humans have a tendency, however, of replicating the same blunders over and over (poor diets, dysfunctional relationships, impulsive buying, etc.) causing us to relive our errors. If you want a different result, you have to do something different – make better decisions!

We are what we choose to be.

Regards

Paul J. Thomas
Chief Executive Officer
Ductus Consulting

2 Replies to “How our lives are shaped by the choices we make”

  1. You have explained opportunity costs, cost-benefit analysis, and behavioural economics in a way we can all understand – thank you. I base my comment today on the practice of instant gratification – the experience of satisfaction as soon as a response is made. How to deal with the problem! 1. Watch the urges. 2. Delay. 3. Make conscience decisions. 4. Learn over time. 5. Enjoy the moment without following the urge.

  2. Hello Paul,

    Thank you for the educational article; I found it very clear and enjoyable to read.

    It highlighted the importance of thinking through decisions regarding the impact on others, balancing thoughts with emotions, opportunity cost/scarcity, behavioural economics, unconscious bias (businesses now featuring this in training) and having the ability to learn from mistakes.

    A good example, I have always been interested in why Hitler made the exact same mistake as Napoleon when invading Russia.

    Many thanks,

    Des

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