A large part of our success, personally and professionally, stems from our ability to make sound decisions. We typically consider ourselves successful when our decisions lead to expected, positive results. For example, we hire someone and they turn out to be a top contributing team member. Or, we raise salary levels and see a sharp drop off in employee attrition. If only it were that easy. Unfortunately, the effectiveness of most decisions are difficult to accurately measure. A concept from economics known as unintended consequences explains why this is so.
Frederic Bastiat was a French 19th century political economist. He wrote several famous articles that simplified economic principles, making them accessible to lay persons. One particular work, That Which Is Seen and That Which Is Not Seen, explained the concept of unintended consequences, as well its cousin, opportunity cost. Bastiat described how any action “gives birth not only to an effect but to a series of effects.” Typically, only the immediate effect is seen. The secondary effects, however, are not seen. As Bastiat noted, most decisions, and subsequent actions, are judged on their immediate, visible effects. The secondary results, often unseen, or unlinked to the original action, are overlooked.
Let’s look at some practical examples of unintended consequences at work. Imagine you are an IT executive, tasked with cutting your expenses as part of a corporate cost control initiative. You make a decision to forego a PC replacement project, believing it can be deferred to next year. What is “seen” is the immediate improvement in expenses. What is “not seen” are a series of secondary consequences. For example:
- The older machines break more frequently, resulting in an increase of help desk calls. This in turn leads to longer wait times for agents, followed by a need to increase help desk staffing.
- After an upgrade to the newest Windows version the old PC’s are now significantly underpowered. A number of applications are now sluggish, resulting in poor performance. This results in seconds of inefficiency, thousands of times a day across the organization.
- An addition of an important new business application must be delayed because the PC’s lack sufficient power.
- A long time employee, frustrated with the antiquated hardware, decides to quit, joining a more technologically progressive firm.
- A top customer, seeking support from customer service, is asked to wait while an agent reboots their machine. After this happens a second time, the frustrated customer switches to a competitor.
One could argue that some of these effects would in fact be noticed. But many of the effects are dispersed, delayed or hard to connect to the original decision. Therefore, an executive might continue to feel confident that their original decision was, overall, a positive one.
Bastiat also described how the concept of opportunity cost related to unseen, or hidden consequences. Let’s look at another real world example. Assume you are the Director of HR for a small company. You are considering a proposal to establish a company gym at your main location. Ultimately you decide to approve the gym based on cost data, employee surveys and benefits research. Without considering opportunity cost you would be missing one major decision factor.
Opportunity cost means that any decision to expend resources must be considered in terms of alternatives. That is, if the primary decision wasn’t made, how could the resources have been applied to alternate ideas? Furthermore, which alternative would have provided the greatest benefits?
In the case of the decision regarding the gym, could the dollars have been spent more effectively? Let’s limit the universe of choices to other employee benefits. Instead of the new gym, the same dollars could have been spent on enhanced medical coverage, improved cafeteria subsidies or a new transit voucher program. Without assessing these different alternatives, the gym could appear to be a great decision. The alternatives, all “roads not traveled”, would never be seen.
What practical steps can professionals take to learn from Bastiat, recognize unintended consequences and ultimately make better decisions? The following best practices can help:
- Awareness – Make it a corporate practice to always consider secondary effects and opportunity costs when making key decisions.
- Collaborative Decision Making – Including a broader group of decision makers improves your ability to predict secondary effects and to suggest alternatives.
- Historical Perspective – Consider how similar decisions have fared in the past. What lessons were learned regarding unintended consequences?
- Benchmarks – Looking at competitor practices can provide an important additional point of reference when making key decisions. It allows one to establish a normative range of options, serving as a sanity check.