In your life, you have to make a lot of decisions. Most of the time, there are\u00a0uncertain factors in your decisions, because they have\u00a0to do with the future. For example:<\/p>\n
Later on, you will sometimes look back at such decisions. It is very human to look at the result to determine whether the decision was good.<\/p>\n
This is called results-oriented thinking<\/strong>. This term is used a lot in gaming, for example in\u00a0poker<\/a>\u00a0and in Magic: the Gathering<\/a>.<\/p>\n Let’s look at this a bit closer. Is this a good\u00a0way to judge your decisions?<\/p>\n The bicycle insurance. Let’s say your new bicycle costs 1,500 euros<\/strong>, half of your monthly salary. That is a lot of money. An insurance against theft and damage sounds like a good idea.<\/p>\n Of course, if you know\u00a0beforehand that\u00a0your bicycle is going to be\u00a0stolen, the correct decision is\u00a0to take the insurance. But you cannot know this. The best you can do, is to estimate the probability of theft.\u00a0Maybe the local police has statistics which indicate that the risk of theft of expensive bicycles is 10% in the first year. Let’s use that number: 10% chance of theft<\/strong>.<\/p>\n If the insurance costs 1 euro\u00a0for\u00a01\u00a0year<\/strong>, most people would take this insurance. And if it costs 1000 euros for 1\u00a0year<\/strong>, most people wouldn’t. There is no need for fancy calculations here – people instinctively know that the former is a good deal and the latter is a bad deal.<\/p>\n Somewhere between 1 and 1000 is the right price for this insurance. In this case, it’s a simple calculation: the risk of theft multiplied by\u00a0the price of the bicycle. So 10% x 1500 euros = 150 euros<\/strong>. *<\/p>\n The right way of judging your decision, is to\u00a0compare the actual price\u00a0to the right price<\/strong>. The wrong way is to use the result of the decision: has\u00a0my bicycle been stolen?<\/strong><\/p>\n Assuming a 10% chance of theft, buying insurance for 1 euro is a good\u00a0decision, even if your bicycle is never stolen. And buying insurance for 1000 euros is a bad decision, even if your bicycle is actually stolen.<\/p>\n So, next time you are wondering whether a decision you made in the past was a good decision, remember the information you had at the\u00a0time you made the decision instead of looking at the result, and judge based on that.<\/p>\n *) I’m looking at it purely financially, ignoring any emotional factors like loss aversion<\/a> here.<\/p>\n","protected":false},"excerpt":{"rendered":" In your life, you have to make a lot of decisions. Most of the time, there are\u00a0uncertain factors in your decisions, because they have\u00a0to do with the future. For example: Shall\u00a0I buy insurance for my new, expensive bicycle? At what … Continue reading