Though some may disagree, I believe in America, the greatest determiner of ones’ success in life is the sum total of the decisions they personally make. Other factors, of course, also play a role, but if the decisions you make are generally wise and effective, you will succeed.
One of the key strategies CEOs use before making decisions is something called a cost-benefit analysis. While the process can often be complex, the concept is actually quite simple. In layman’s terms, a cost-benefit analysis is simply the act of weighing the potential benefits of an action against the potential costs of taking that same action.
For example, when considering the purchase of a brand-new sports car, the benefits might include the enjoyment of driving it, the pride of owning something so nice, a feeling of increased self-esteem, etc. At the same time, the potential costs might include the negative financial impact it may create, the increased danger of becoming the victim of theft or an accident, or perhaps marital strife if your spouse is opposed to the purchase. In the end, what we decide is usually dependent on which side is more convincing.
We do this type of analysis thousands of times every day, from choosing what to eat for breakfast to deciding what time to go to bed. Unfortunately, too many of us do not take the time and effort needed to really weigh important decisions in a systematic and logical way. Instead, decisions often get made based on emotional factors or in a rushed fashion that doesn’t allow for all perspectives to be considered before acting.
Investing is one area where I see these behaviors on display. I cannot tell you how many times I have worked with a client who did not really consider all the pros and cons of choosing their risk level before investing. For instance, those who choose to invest their money conservatively must consider how long their money needs to last, the potential impact inflation could have on the future buying power of their savings, and how they will feel if their growth doesn’t match what others around them are receiving. For those who invest more aggressively, they must consider how they will feel when market volatility causes their balances to rise and drop rapidly. Will they be able to stay invested if the market drops by 50%, as it did in 2008? Or will fears of market downturns affect their overall health and peace of mind?
In almost all aspects of life, with opportunity comes risk, and for every positive result, there is a cost associated with it. The key is not eliminating the potential costs but instead developing a realistic understanding of what they are and then deciding if the outcome is worth the price that must be paid. A cost benefit analysis is a great way to help determine that. Harvard Business School recommends a four-step process for doing one.:
1. Establish a framework. This simply means determining the objective your decision is seeking to accomplish and how you will measure the impact your decision had in reaching that objective.
2. Identify all potential costs and benefits. In this step, you must be honest and realistic about the benefits you may receive by choosing a particular course of action and what exactly the costs will likely be.
3. Assign a total value to each side. To really determine the right decision, you must consider all costs and benefits, not just the monetary ones. Factors such as time, happiness, health, and many others must also be considered.
4. Compare the benefits to the costs. Assuming the variables are accurate and the values of each are true, this comparison can provide a simpler answer to a complex dilemma.
It may at times seem unnecessary, but I suggest before making a significant decision that you sit down and make yourself complete these four steps on paper. For whatever reason, I have found it helps me to be more realistic and accurate when forced to write them down.
The next time you are considering a consequential purchase or life change, I encourage you to follow these steps. I bet you will be amazed by the level of confidence and clarity you gain by being intentional in how you go about making the decision.
(Past performance is no guarantee of future results. The advice is general in nature and not intended for specific situations)