Your brain is lying to you, and your stomach is making all the decisions.
We like to think that we will make rational decisions if we have all the necessary information. But that’s far from the truth. David talks about how you can use economic decision-making to your advantage in your business while also avoiding pitfalls.
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It turns out your brain is lying to you, and your stomach is the one making all the decisions. Economic decision-making is a lie. Today on The Buck Stops Here.
Hello, and welcome back to another episode of The Buck Stops Here podcast. I’m your host, David Maples, and today we are in season two, episode four called, “Economic Decision-Making is a Lie.” So, let’s unpack this right at the beginning. What is economic decision-making? Economic decision-making is the idea that humans act in their own rational self interest.
That ultimately, if you give human beings enough data, they will make the best decisions for what they’re trying to do. They absolutely will make the best decisions if you give them enough data. It turns out human beings aren’t machines. Big surprise.
We make decisions mostly based on emotion. According to some studies, over 85% of all human being decision-making is based on emotion. And so economists tend to tell you, sorry, economists.
If you’re listening to the podcast, I’d love to hear from you. I’d love to bring an economist on here at some point in time and talk to you about this. But they believe that if you give people enough data and do these things, they’ll make the best decisions for them based on their situation. Well, it turns out, that’s a lie. It’s totally a lie for two reasons.
Number one, you can never have all the data. You never can. You just never will. No matter what you do in life, you will never have all the data to make a perfect decision. Number two is rooted in biology.
Your cerebral cortex is the place that you can do math, language, music, a lot of these higher function things which from an evolutionary standpoint, have only been around a minute. I mean, they’ve been around hundreds of thousands of years. Whereas the limbic system kind of the reptilian portion of your brain, the portion your of brain that controls a lot of autonomous stuff, a lot of things you do without thinking about. When you go with your gut, that’s generally your limbic system that’s activating. And what does that mean? Well, it turns out that you’ve got this evolved system in your brain, of all mammals, that’s been around for millions and millions and millions of years.
And it turns out, it’s much more powerful in the decision making argument than your rational cerebral cortex portion of your brain. It also takes in a lot of things you can’t see or don’t think about. Some things that are important to you, et cetera, that you may not think about on a regular basis. It’s looking at those things and it’s making decisions on fight, flight, survive, eat food, make fire, cold. It’s doing all these things that are required to keep you alive and healthy and it’s helping make decisions all the time. You don’t even think about it.
A lot of times we operate on autopilot, so to speak. So, what does it come down to? Well, at the end of a long day, you’ve kind of tapped your neural energy. It’s why you make bad decisions late in the day. You choose to order food out when you’re tired.
You don’t want to make a meal, even though you’re on a diet, and you’re supposed to be eating healthy, you’re watching your blood sugars. You’re supposed to think about what you eat. It’s a lot easier to make those decisions when you’re fully rested and have full energy reserves kind of first thing in the morning. And it turns out, the cerebral cortex requires a lot of horsepower and a lot of power to run. It requires a large amount of energy at any given time to run the system, et cetera.
And so what happens is late in the day when your oil reserves are tapped and that kind of thing, your limbic system is like, man, I still can run for days. Your cerebral cortex is having a hard time with executive control and those things late in the day. When you’re tired, you make bad decisions. It is a highly evolved system, but a system that requires incredible resources and reserves to act at the best way. A little tip for you, when you’re fully hydrated, your brain operates 3% to 6% more efficiently.
So, there’s a quick tip for you. Make sure you drink plenty of water because you will operate at a better outcome at any given time. So, cheers. So today’s episode is really about- I’m going to break it up into three parts. I’m going to go through kind of easy, medium, hard. Kind of the easy things to understand, to the medium, more difficult things, to the hard kind of extra credit activities.
And we’re going to cover three distinct areas in which economic decision-making can be used to your advantage and also to your detriment. So you need to be aware of the pitfalls there. We’re going to go through sales first, hiring second, and kind of addressing new opportunities as the third thing. So, starting at the beginning, sales is really easy for most businesses to understand. I’ve said before in the podcast that you can actually have a company as long as you have a sales team, even if you don’t have a product. If you don’t have a sales team, you don’t have a company.
You just don’t. At the end of the day, that’s the one activity you have to have before you do anything else. So, when you look at selling something, right, if you’re buying something, we’ll flip it that way. When you’re buying something, you say, I want to make the right decision.
I want to have as much data as possible to make the correct decision. Now, assuming you’re getting the right data, which is also highly suspect, because that’s the worst part, is when you get bad information sometimes and then make a bad decision, you couldn’t control that at all. And you kind of want to kick yourself. But, you get all the data and you’re going to make the best decision possible. Well, the easy things to quantify are kind of your costs, your direct costs of things you’re looking at. And this is where I want to talk about the tip of the iceberg in this episode.
You’ll hear us talk about that a lot of time. Tip of the iceberg and the Pareto principle, which is the 80/20 rule, are probably two of my favorite stats to try out there. So, an iceberg, only about 10% of the actual iceberg is above the waterline. The bulk of the thing is below the waterline.
And the problem with economic decision-making is there’s a lot of other factors there. Now, economists might tell you that everything else I’m going to tell you is part of the economic calculus. But my argument is that it’s a lie, not because you don’t have the data. It’s because you don’t even know what the data points are, and you don’t know how to quantify them. So, for example, you decide to buy a product or buy a service.
Well, the easy things to think about are what are the outcomes. How much business is it going to make my company? What’s my profit margin? Anything you put in a spreadsheet, it’s easy economic factors. So, let’s talk about you buy a product or you buy a service or you agree to hire a company that doesn’t match up with your ethos. So, you hire a company that has less than savory means of generating leads for your company, for whatever reason. And you run a very ethical and honest company, but you’ve hired a very dubious outfit. What is the cost to your company when you do that?
There’s definitely a cost. It’s probably an economic cost. But how do you even quantify that? What do those things look like? How do you factor in all these things at the end of the day?
One of the examples I like to give to people is when you’re buying a car. Everybody pretty much has bought a car at some point in their lives. Why, if you’re making economic decisions in your own best interest, why do you cross the street to save $100 or $500? Why do you go spend another four to five hours of your weekend, if you value your time as a business owner at, let’s say, $100 an hour? Which is a good bellwether thing for most small business owners.
Why would you go spend an extra four to five hours to buy the same product with the same features and services, with the same warranty from another dealership across the way to save $300? Is it because you like to get a deal? Well, how do you quantify getting a deal? Is that an economic decision-making factor?
Does it make you feel better about what you did at the end of the day? I mean, the fact is you went with your gut. You didn’t like the guy; the salesperson was slimy; you didn’t like the color of the dealership. You didn’t like the smell when you got into the restaurant, so you decided to leave, even though the food might have been great coming out of the kitchen. But there was kind of funky smell.
Was that an economic decision factor? No, it was all this stuff. It’s this 80% of the reason why you’re making stuff, why you go with your gut. And you make decisions a lot of the time, the vast majority of your time. Even the most bean counter-y people out there, if you lived your life by numbers and things like that, you’re not a computer and you’re making decisions all the time based on this. How did you decide on your spouse? Was it purely economic?
Did you work out how much your families would be worth together and how you could do things together, et cetera? No, there’s other factors involved from that, right? And all those kind of come into emotion. It’s why we go with our gut a lot of the times. So, remember that’s when you’re buying.
So, be aware of that. Be aware that you’re not looking at these other factors you haven’t thought about. The same side of this, the flip of the coin, is when you’re selling to other people. A lot of us talk about facts and figures. The company I work for does a lot of storytelling and copywriting for clients, right?
And we have this thing we call FABS: feature, advantage, benefits, and stories. Well, the fact is, features and advantages are that economic decision-making factor. What features does it have? What advantages does it provide to me? But people always buy the benefits.
The old adage is they buy the sizzle, not the steak. They’re buying the benefits to them. How do you quantify the sizzle of a steak? How do you quantify picking that restaurant out for a first date? Is there an economic factor in there?
Now, economists would like to say you could always boil this down to numbers. I’m submitting that most of us don’t have the skill set, wherewithal, ability to look at those things, and we aren’t professionally trained in looking at those things, and we don’t even know how to quantify them at the end of the day. So, this is why economic decision-making, fundamentally, is not how you make decisions. When you’re selling to people, you must sell to the economic drivers. Because they’ve all been told by a business coach or a consultant or some expert out there in the marketplace, they’ve all been told, well, you need to get all the things and build that T square where there’s pros on one side and cons on the others.
And you got to assign values to them. You run into analysis paralysis. What do you do when you have two identical choices where there’s the same number of things on the pro side for two different choices? What decision do you make? This story may be apocryphal, but I read years ago that there were some Fortune 50 companies, and when they had their board of directors, and if they were ever evenly split on the decision. So, let’s say one person’s abstaining, and it’s three-three and they’re deadlocked in a decision.
Three people think we should do decision A, three people think we should do decision B. What should you do? Well, the thing is you could spend another six weeks trying to get one more data point, but there’s a cost for spending six weeks on your decision making. So, they would just flip a coin, and then go with whatever decision.
And they found that that more often than not, when they were evenly deadlocked on decisions, the time they saved by going ahead and taking action. And you will find in this podcast I have a bias towards action. Generally speaking, I have a bias towards taking action. Remember, not making decision is also an action in and of itself. But, I have a bias towards action, and I find that the time you lose is something you can definitely quantify, and not taking action when you’re deadlocked on something, I guess you could decide not to take action at all.
You flip a coin to not make a decision, or whatever it is. Or maybe it’s heads, we go forward, but one of them tails we don’t. You can boil it down however you want, but at the end of the day, you want to make sure you’re taking action. So, when you have your T square or your T pros and cons set up on your chart and you’re deciding between option A and option B, you know it’s really flipping a coin at that point. Remember, you’re going to make a lot of these decisions based on non-economic, and so will they. So, when you’re selling the other people make sure you trot out the benefits and the features and things like that.
But remember, they’re going to go with you, generally speaking, more than half the time, probably 80% of the time, based on those emotional needs. You want to talk about what the experience is like working with your company. You want to talk about like the other intangible things that they don’t get with someone else. You get to work with me if you like me. People work with who they know, like, and trust.
I’m sure you’ve heard that somewhere before, right? What of those are economic factors? Know and like are not economic at all. That’s two thirds of the equation. Trust? That’s the only one you could probably economically say, do you trust them to do the service? You trust them to provide what they’re offering of what they said they’re going to do. So, this is the easy one. This is the sales piece on that. Remember, you want to show them the facts or figures, but you want to really hone in on those emotional points if you’re trying to sell them.
Remember, you’re also being sold the same way. But, at the end of the day, I’m going to say, so what? That’s how you’ve made decisions your entire life. It’s how you’ve gotten by and you’ve survived as a species to this point in time. If your gut serves you well so far, you’ll make bad decisions, but I’m not sure you’re going to make better decisions with all the data on the planet.
And plus, you’re going to have to lose a lot of time to make that. You must get uncomfortable as a business owner with making decisions on imperfect data. If you are not comfortable making decisions with imperfect data, you should not, I repeat, you should not be running a company. The next one is about hiring. This is the one where I think it’s something you may not have thought about in your business yet, or maybe you have, but there’s all these things. HR departments are legion with the number of things that they say, oh, you should put everything in your economic package.
You should say, here’s how much the job pays. Here’s how much your benefits are worth, right? Here’s the number of paid days off you get a year. Why are you not selling the intangibles: the fact that your company has a really good reputation, the fact they get to work with you, the fact that they can learn from you. Some people go to work for companies not because they think the company is a good company, just because it looks good on a resume.
That is a future expectation. By the way, it’s a little bit of a gamble. You’re banking on that company: A, having good reputation in the future, and B- I worked for a really good company, considered one of the best companies in the United States, 15 to 20 years ago, let’s just say. And without saying anything about it, they got embroiled in a major fraud scandal about five years after I left. I don’t talk about that company anymore to anybody I ever work with.
It was great getting hired after I left the company, but one of the best companies to work for. And now, if you look at it, it’s kind of like, tell me about your time there. I was there before the fraud stuff happened, okay? I promise you, I was there before this happened. This was not my fault.
So, that being said, these are things to think about, right? So, when you’re hiring, remember, they’re also making this decision not largely on economic factors. Think about the other things. And I run into clients all the time who tell me that they can’t get the right- I can’t possibly pay as much as XYZ engineering firm pays.
True story. Had this conversation six weeks ago with a client who runs a big, great engineering firm, but don’t have top of market dollars to hire engineers from these other big petrochem companies who have more money than them. I was like, well, what are your intangible factors? We’re a small, close-knit team. You get to work on a lot of different projects. You’re not stuck in the same thing, working on the same projects.
These are all very valuable things. As an engineer, you might want to work on a lot of different projects. You might get bored. And by the way, the right fit for you as an engineer is someone who’s going to like working in these different divisions and on different projects. The agency I work for, we work for a lot of different companies.
We’re not only writing for one particular- My writers love that. They think that’s great to get to write on other projects, sometimes. Because it’s just, you get bored writing about the same thing every single day. Now, do all writers like that? No, but the writers [who] are going to be the right fit for my agency like that kind of thing.
So, also highlight the non-economic factors, the other things that are important. The fact that you work with a schedule, that you work with family emergencies, the fact that you give bereavement pay, or you pay for maternity and paternity. Do those things have economic value? Sure. Do they have economic value even if you aren’t deciding to have a child? Yes, because the opportunity cost of giving that up in the future, you may decide to have a child or adopt.
You don’t know what’s going to happen in five years. But the fact that your company already has something in place, even if it has no economic value to you today, is very valuable in the future. If they work remotely or work from home, highlight those features. Like, how does that change things for them? Well, you don’t have to drive to work every day.
You don’t have to get daycare for your pets or child care for your children. That’s got a huge economic value to it. You want to outline those things. Can you outline those things for every single person who works for you? No, because they don’t apply to every person who works for you.
They apply to some, not all. So, in hiring, if you don’t say these things, if you don’t at least let them know about the other intangibles, they’re never going to know. And don’t expect them to figure it out on their own. At least, point that out for them. Let them know that, hey, you can do these things.
Did you know that it lets you do this? My company has a work from anywhere program where you can work from any other state in the United States for up to 30 days per calendar year. Not everybody’s availed themselves of it, but some of my team has, and they think it’s really cool. Some of them are now deciding to move to other places they visited. That’s great.
And that is a way to keep my talent and my team even when they move. So, keep that in mind. Hiring is one of the biggest places you can highlight kind of these you can use this economic decision making, the fact that people are making non-economic decisions to help you with hiring. That’s a very big thing. That should be in your job listings. You should let people know that because all the job listings are always hiring the economic. Everybody can calculate that stuff.
You want to let people know the things that they can’t look at. Same thing in pay raises and other things. 30% of employees would prefer compliments or recognition from their bosses as opposed to a pay raise. I mean that’s insane. How hard is it for you to be kinder to recognize when somebody achieves something? That’s sound money right now in your organization.
If you’re not doing that, you should be. Not because everybody keys on that, but because it’s important for you. And remember, people quit bosses. They don’t quit jobs. So, if you’re a horrible boss, keep that in mind.
That makes you harder to hire. If you’ve got bad reviews on job boards online, you need to address those. By the way, no matter how good your company is, somebody will complain about you. Now, this is the No B.S. portion of this episode. Remember, with any decision you make in hiring and firing or anything else you do as a company, there’s always a human cost of those decisions.
Not going with a particular company or breaking up with an existing company is always, there’s always a human cost. And this is the other side of economic decision-making. You need to address those human costs. You need to make sure you have messaging on point that tells people why this is doing this. When you ever say it’s just business, that means you’re either a terrible human being or you’re full of shit.
Because at the end of the day, “just business” is pure B.S. It’s never just about business. It’s never just about the numbers. There’s a human cost to every decision you make, good or ill.
Cost is always kind of a little bit oversold term. The cost affects everyone differently. There could also be a positive to any decision you make as well. But remember, at the end of the day there’s always a human cost. And if you don’t look below the surface of the water at what’s lying underneath that iceberg, you’re going to miss that stuff.
And that’s the other portion of economic decision-making. The other half of that pendulum. When it swings the other way, it’s the fact that there’s emotional decision-making. And it’s not really a pendulum, because 80% of the decision making is on that side of it. A fraction of it is on the economic standpoint. Brings us to the hardest portion of this that I want to talk about today. This is expansion or addressing new opportunities.
So, Stephen Covey, who wrote, “The 7 Habits of Highly Effective People.” A highly recommended book, and if you’ve not read it as a business owner, stop this podcast right now, go download it, read it, and then come back. I’m just kidding. Finish the podcast first, then come back. But, Stephen Covey said if there was an eighth habit he never got to include in the books, what would it be?
He said he would move quicker to address a problem and slower to address a new opportunity. And what I want to talk about here is partly that economic decision-making. This is really trying to look below the waterline and figure out what portions of that iceberg are you not seeing right now? So, here’s what it comes down to; whenever you’re making an expansion or new opportunity in your business, deciding to add a new division to your company, moving to a new geographic region, hiring new people, you need to basically have a rubric, which I’m going to give you now, the one we kind of work with and say, what is this?
Because the economic factors are easy to calculate. Remember, if you can put them in a spreadsheet, they’re probably pretty easy to calculate. What is our cost to buy the new factory, to add the new assembly line? What will it cost to do this, that, and the other? So, you want to say what are the immediate costs you can calculate is the first thing.
That is the first thing you want in your rubric. It’s like, what are the immediate costs I can calculate? These are the physical economic costs, and these are kind of the things you can come up with in the first 30 seconds, okay? You want to look now at the non-economic costs, okay? You want to look at the people in your organization, how it affects your processes, and you want to look at your clientele. You want to look at in the marketplace and see how this affects kind of your goodwill, your reputation, and affects what other efforts you’re trying to do internally in an organization.
Are you chasing something new because you can chase something new? To Stephen Covey’s point, you got to be careful with that. By the way, If you start chasing 25 things, your team might think that you don’t have a direct focus. There might be a reason to do it.
You want to take your core values and your guideposts of your company. And if you don’t have that, we talk about that a little bit in a previous episode. But you want to actually look at the core values of your organization and make sure that this decision at the very beginning of it lines up with your core values. And core values, for any company, are predominantly non-economic. My company’s core values are accountability, honesty, excellence, respect, ownership.
How do you quantify respect? It’s more of an ideal and aspirational type thing, but it’s incredibly important in our organization. Make sure that whatever decision you’re making right now lines up with these core values. Again, those non-economic factors are going to affect everybody on your team.
There’s a human cost to everything you’re deciding here. Make sure that whatever you’re deciding to do lines up with the decision makers. Then think about your internal and external messaging. Think about how you’re presenting this to your team. By the way, be very careful.
You don’t want to overshare here, but you don’t want to also spew a line of B.S. We ran a meeting with a business consultant the other day who was recommending that we do this new thing for our team. And it was about tracking and monitoring, and it just kind of struck me kind of weird. The fella came from a background in manufacturing and that kind of thing, and there’s nothing wrong about what he said, but it was really economic based as opposed to the non-economic parts of it. I mean, if you start putting your people under a microscope and you’ve never done it before, do you all of a sudden not trust them about something?
And in our particular case, it’s just more about making better decisions, not about our staff. I think our staff is generally pretty amazing, but it’s like, what could we be more efficient on, how we could deliver, how can we deliver a better experience for the client? And we do need to track certain things, and that’s the way we need to do it. But you need to be very careful with that messaging that you don’t destroy the company culture you’ve created.
Remember, I talked about the human cost of things? If you’ve worked years on culture, what does it mean when you all of a sudden change it? And Warren Buffett famously has said, it takes a lifetime to build a reputation and it takes five minutes to ruin it. If you engage the wrong client, or you do the wrong thing, or you start doing something that really looks very dubious and questionable from your core values before, you might as well just flip the table and get a whole new team because you’re going to lose those people. You’re absolutely going to lose those people.
Think about how you’re going to convey the plan, not just what the messaging needs to be. Explain your decisions, at least to some extent. Now, don’t overexplain. They don’t need to know every factor that went into it. But you need to trust your team a little bit.
You absolutely need to trust your team. And so, when you’re expanding- And then make sure you’ve got the right messaging externally. Our company has moved into another market segment very recently. We are now in another marketplace. We’ve been doing stuff all over the US, but we now are putting another base of operation in an entirely other state.
And I am not as available at our headquarters as I once was. Our headquarters have not moved, but there will be talk and chatter in the marketplace that we have closed down our operations there once the competitors catch wind of that. Make sure that you’re in front of that messaging so people know what you’re needing to do on there, because that is a non-economic factor that you haven’t thought about yet or you haven’t addressed, and you need to make sure that you’re messaging addresses those things. Just like when you’re trying to let somebody know about why your company is a good company to work for, that’s what it comes down to.
So, your takeaways today are one, look at everything, not just the tip of the iceberg. You want to make sure you’re looking at those non-economic factors which we consider to be below the waterline. They’re not immediately obvious. And the further down in the water you go, the murkier they become. The harder they are to see, and the harder they are to quantify. Let yourself out of the box is number two.
Recognizing that you will make decisions more often than not that are not economically driven or not primarily economically driven. Let yourself out of the box. You’re going to do that more than half the time, even as a business owner. And the third thing is, sometimes you just have to go with your gut and trust yourself. There are things that you will take in based on your wealth of experiences and where you’ve been, and sometimes you need to look at those things.
If you need to challenge your gut at some point in time, get a third party or outside observer to bounce these ideas off of. I do this kind of consulting all the time for clients, but a lot of times they can see what you can’t see. They also, because of perspective, might be able to see deeper underneath the surface and see things that you might be missing. So with that, we’re at the end of another episode of The Buck Stops here. Thank you for listening.
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