You may already be familiar with cost-benefit analysis when making decisions, but I’d like to unpack a key part of this process you may not have appreciated.
Simply put, cost-benefit analysis is weighing up the costs and the benefits of an action. If the benefits outweigh the costs, we’ll act. If costs outweigh the benefits, we don’t act.
The challenge arises when we compare the present with the future.
It’s easy to assess an immediate benefit or cost of an action. You may sacrifice some time or some money, and in exchange you get a clear benefit.
But the further we look into the future, the more the outcomes shift from tangible to intangible. Unfortunately, we don’t do a great job at assessing intangible things.
Usually we have to incur a cost before we receive a benefit (it’s very rare that we get a benefit first and then incur the cost later). So the costs of a decision seem very real, but the benefits in the future are difficult to conceptualise. We tend then to overweight the immediate cost we’ll incur, and underweight the potential benefit we may receive.
To get around this problem, here’s a helpful solution. Consider costs as ceilings and benefits as floors. When you are dealing with tangible costs, think about the limits of the costs that you are willing to incur. Then with the intangible benefits, think about the worst-case outcome and then work your way higher.
This method allows you to better explore an opportunity, and possibly take action.
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