Why It’s Never Just a Two-Horse Race

The Art of Thinking Clearly - Rolf Dobelli 2014

Why It’s Never Just a Two-Horse Race

Alternative Blindness

You leaf through a brochure that gushes about the benefits of the university’s MBA degree. Your gaze sweeps over photos of the ivy-covered campus and the ultramodern sports facilities. Sprinkled throughout are images of smiling students from various ethnic backgrounds with an emphasis on young women, young Chinese, and young Indian go-getters. On the last page you come to an overview that illustrates the financial value of an MBA. The $100,000 fee is easily offset by the statistical extra income that graduates earn before they retire: $400,000—after taxes. Who wouldn’t want to be up $300,000? It’s a no-brainer.

Wrong. Such an argument hides not one but four fallacies. First, we have the swimmer’s body illusion: MBA programs attract career-oriented people who will probably earn above-average salaries at some stage of their careers, even without the extra qualification of an MBA. The second fallacy: An MBA takes two years. During this time you can expect a loss of earnings—say, $100,000. So in fact the MBA costs $200,000, not $100,000. That amount, if invested well, could easily exceed the additional income that the brochure promises. Third, to estimate earnings that are more than thirty years away is idiotic. Who knows what will happen over the next three decades? Finally, other alternatives exist. You are not stuck between “do an MBA” and “don’t do an MBA.” Perhaps you can find a different program that costs significantly less and also represents a shot in the arm for your career. This fourth misconception interests me the most. Let’s call it alternative blindness: We systematically forget to compare an existing offer with the next-best alternative.

Here’s an example from the world of finance: Suppose you have a little money in your savings account, and you ask your investment broker for advice. He proposes a bond that will earn you 5 percent interest. “That’s much better than the 1 percent you get with your savings account,” he points out. Does it make sense to buy the bond? We don’t know. It’s wrong to consider just these two options. To assess your options properly, you would have to compare the bond with all other investment options and then select the best. This is how top investor Warren Buffett does things: “Each deal we measure against the second-best deal that is available at any given time—even if it means doing more of what we are already doing.”

Unlike Warren Buffett, politicians often fall victim to alternative blindness. Let’s say your city is planning to build a sports arena on a vacant plot of land. Supporters argue that such an arena would benefit the population much more that an empty lot—both emotionally and financially. But this comparison is wrong. They should compare the construction of the sports arena with all other ideas that become impossible due to its construction—for example, building a school, a performing arts center, a hospital, or an incinerator. They could also sell the land and invest the proceeds or reduce the city’s debt.

And you? Do you often overlook the alternatives? Let’s say your doctor discovers a tumor that will kill you in five years. He proposes a complicated operation that, if successful, removes the tumor completely. However, this procedure is highly risky, with a survival rate of just 50 percent. How do you decide? You weigh up your choices: Certain death in five years or a 50 percent chance of dying next week. Alternative blindness! Perhaps there is a variant of the invasive surgery that your hospital doesn’t offer but a hospital across town does. This invasive surgery might not remove the tumor altogether, just slow its growth, but is much safer and gives you an extra ten years. And who knows, maybe during these ten years a more sophisticated therapy for eradicating tumors will be made available.

The bottom line: If you have trouble making a decision, remember that the choices are broader than “no surgery” or “highly risky surgery.” Forget about the rock and the hard place, and open your eyes to the other, superior alternatives.