Chalkboard Decisions

Read this and though it worth sharing.

There is a certain category of decisions that work well in the classroom but not in real life. I call these chalkboard decisions. These decisions tease us because the math always seems correct. 

The problem is that most decisions are less about the math and more about judgment. The math always points to the optimal immediate decision, which is rarely the best long-term decision. 

Consider paying off your mortgage. With 2% interest rates, the spreadsheet will tell you it doesn’t make sense to pay off your mortgage. Instead, put the money you would have used to pay off your house in the stock market. Assuming an 8% return, you’d be much better off. 

The math in chalkboard decisions is irrefutable. And yet, the best decisions are often based on positioning yourself for things you can’t see. 

What if we have a pandemic? What if the stock market drops 20% or 30%? What if mortgage rates rise 10%? Can you handle these events with equanimity, or will circumstances force you to do something you don’t want to do? 

I see the same thing in business all the time. The math says lever up, reduce inventory, pay your employees as little as possible, charge your customers as much as possible, and take advantage of the weakness of your suppliers. You don’t need to look far to see companies who take this approach. In the short term, these decisions almost always seem optimal. In the long term, they almost always fail. 

If it helps to visualize chalkboard decisions, imagine standing at the base of a 2000m mountain with two paths in front of you. You can only see the next 100m of each, and one path looks easier. If you only consider what you can see, you’ll choose the easier path. Only after you walk the first bit do you realize that choosing the easiest visible path leads to a cliff and doesn’t take you where you want to go. 

Our ability to predict the future is never as certain in the real world as in the classroom. No matter how compelling the math, the best chalkboard decision might not be the best overall move.

© Farnam Street