Trade-off

Trade-off

A giving up of one thing in return for another. The goal is to find the trade-off which will produce the most desirable outcomes.

Scenario 1: A college student is faced with a choice of getting an internship which will pay off handsomely after graduation or push the internship to a later date so the student can experience the college life.

Scenario 2: Put a marshmallow in front of a child, tell her that she can have a second one if she can go 15 minutes without eating the first one, and then leave the room. Teaching the trade-off between short- and long-term gains often comes to play during parenting.

Definition

Every decision has trade-offs: when you choose to do one thing it means you choose not do some other thing. Certain situations have two or more desirable outcomes. There are times when all outcomes cannot be achieved together: there will be losses and gains with each. You need to find the trade-off which will produce the most desirable outcome.

Deep Analysis

There are no solutions. There are only trade-offs. — Thomas Sowell
Economics teaches you that making a choice means giving up something. — Russ Roberts
Strategy is about making choices, trade-offs; it's about deliberately choosing to be different. — Michael Porter

The value of what we have to give up in order to choose something else. As with any other cost, the goal is to minimize it. Opportunity costs are very real. A central component of economics is the time value of money which means that money today is worth more than money in the future. Economically, this relationship is entirely based on opportunity costs.

In situational decisions, something has to give. In other words, a trade-off is when one thing increases, the other must decrease. For example, a full room of objects can fit only a certain volume of things. In order to fit more in, something has to be removed. Limitation like this are known in many disciplines such as physics, economics and biology.

This comes handy in making strategic decisions. It's a tactic that many leaders use. For instance, should an energy company continue to produce more oil to support world's demand while damaging the environment? Or, should it introduce greener technology? But will have to bear more risk because it might not lose money because a reliable green technology does not exist yet at a larger scale. These type of examples are commonly asked when leaders make decisions. Each decision has an advantage and disadvantage. The one which has the least disadvantage and the most advantage is the one a leader should make.

  • Should you invest in a bond or a stock?
  • Should you go to school or not?
  • Should you study engineering or art?
  • Should you buy a small fuel-efficient car or a large fuel-inefficient car?
  • Should you work long hours or short hours?
  • Should you work more or spend time with kids?
  • Should you cook at home to save money or eat out?

We often wrestle with these types of trade-offs. These aren't easy decisions to make, and therefore we avoid them.  We can only pick one side so focusing on which one rewards the most is where we should spend our energy. Making sacrifices is normal during trade-offs.

Winners embrace hard work. They love the discipline of it, the trade-off they're making to win. Losers, on the other hand, see it as punishment. And that's the difference. — Lou Holtz

When we choose to optimize a choice, it means we are sub-optimizing another choice.

Explore More Models