Consider the following situations:

• You’re voting in a referendum deciding whether another lane should be added to a bridge.
• You’re choosing which charity to donate to to alleviate hunger in the Third World.
• You’re deciding whether to go to party, because you are going on vacation tomorrow and don’t want to get sick.

Now suppose you made the following decisions for these problems:

• You believe that a new lane on the bridge will reduce traffic, so you vote yes on the referendum.
• You find a charity that has a track record of alleviating hunger in the Third World, so you decide to send your donation to that charity.
• You know that your chance of getting sick will increase if you go to the party, so you decide to stay home.

Take a moment and think about whether these decisions and their explanations sound reasonable.

I claim that these explanations are actually not reasonable. What’s wrong with them? They all consider the direction of a decision’s effect, but not the cost. What I mean by direction is whether an effect is positive or negative. If you donate to any charity providing food in the Third World, hunger will go down. If a lane is added to the bridge, traffic will go down (or at least throughput will increase). And if you don’t go to the party, your chances of getting sick will go down. These are all positive effects, but that’s only part of the puzzle, you also have to look at cost. Otherwise, with this kind of thinking you can convince yourself of any conclusion. Building the extra lane will cause to the government to lose money, which is a negative effect; if you only focus on this effect being negative, then you’ll decide to vote against it. Note that whether the cost of a decision is in dollars or in something else like time spent, probability of some negative outcome etc., we can still call it a cost.

Let’s look at the first example with the bridge. The important question is not whether it would be nice to have an extra lane on the bridge, because that’s obvious. The important question is whether it’s worth the cost. Is adding the lane the best use of limited government funds? To answer that question, you have to have an idea of what the opportunity cost is, that is, what is the best use of the money if it was not going to be spent on the bridge? You then need to figure out if the per dollar benefit of adding the extra lane is worth it.

For the charity example, how much you’re donating remains constant no matter where you donate the money to. However, where you donate it to will affect the per dollar value of your donation. If you donate to a very efficient charity they will be able to feed more people with your donation than if you donate to a lower efficiency charity. It’s easy to find a charity that has a positive impact, the hard but extremely important part is trying to figure out which one has the most positive impact per dollar.

In the last example, the cost is not spelled out in dollars, but in the enjoyment that you forgo by not going to the party. The size of this cost is critical to whether it’s a good idea to stay home or not: if you have reason to believe that if you go then there’s a 50% chance you’ll get a nasty flu, you should probably stay home. But if it’s a 0.01% chance, then you should probably go.

For some kinds of decisions, people naturally think about cost effectiveness. At the grocery store you can see the price of items per pound (which is the inverse of pounds per dollar). Unless money is no object to you, if you’re looking at meat, for example, you don’t pick up just anything that looks tasty. You look to see the price per pound, and decide if it looks tasty enough for the per pound cost. However for many other kinds of decisions, people are often not in the habit of thinking cost effectively. This is especially true for emotionally charged decisions, like those related to personal or family safety. For example, it’s easy to sell parents on various products or services that promise to keep their children safer, but just ‘safer’ is actually a low bar to clear. How much safer does it actually make them, and is it worth the cost?

Another example of poor cost effective thinking is how governments and individuals reacted initially to the COVID pandemic, and later how they reacted to the newly developed vaccines. Often government messaging would talk about different actions that would keep people safer, without actually quantifying how much safer. Of course, in the early days little was known about the disease so it made sense to be conservative, but even once it was known that outdoor transmission was very rare, for example, the messaging did not change much. And when the first vaccines started to be used there was a massive reaction to extremely rare side-effects like blood clots. It’s terrible to get a blood clot from a vaccine, but just knowing it’s possible for a vaccine to give you a blood clot does not tell you anything about whether that’s something that should significantly factor into your decision to take it. In fact, it seems likely (to me) that the pulling of the Johnson & Johnson vaccine led to many more deaths from COVID than would have been caused by the vaccine’s side effects.