Each day we make a lot of small decisions that don’t mean a lot. However, when we string them together as a consistent habit they can make the Difference between happiness and Despair. Here we look at how to make smart decisions.

The Cost of Investment

Every time an investment dMarginal Thinkingecision is made, there are two alternatives. The first is the full cost of making something new from scratch. The second is to leverage what already exists so you incur only the marginal or additional cost. Almost always the marginal cost will appear to be the better option.

However, it has a built-in trap. It ties you to your existing capability. In contrast, any startup competitor does not have a marginal cost, they only have the full cost. And, therefore they’re more likely to experiment with creating the new capability in a new way. And, this becomes the potential seed for market disruption.

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Marginal Thinking

Marginal thinking allows you to see the cost of the new investment, however it hides the cost of not investing. This is the innovators curse. When things are going well, why would you invest in something else that is not proven? In the short term your decision will be correct. And, in the longer term it’s likely to cost you badly as new players take up the opportunities you failed to pursue. This is why Netflix beat Blockbuster.

Slippery Slopes

Marginal thinking also applies to our decisions. The marginal cost of doing something ‘just this once’ seems small. Yet, it often leads to a slippery slope and possible regret. Drugs, insider trading and marital affairs often start in this way because the allure of ‘just this once’ and marginal thinking hides the true cost of our actions. It’s easier to stick to your principles 100% than 98%!

Questions

This is an extract from the Book Rapper issue CEO of Your Life and is derived from the book by Clayton Christensen, James Allworth and Karen Dillon, How Will You Measure Your Life? Here is a review of this book, plus a peek at the Book Rapper issue.

 

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