Nobel laureate Herbert Simon coined the phrase “satisficing” to describe a decision making process that takes the shortcut of defining what is acceptable and then settling on the first alternative that meets those minimum requirements. It’s a play on satisfy and sacrifice, meaning that you sacrifice the best alternative for one that adequately satisfies your demands at the current time. From where you park your car, to who you go out with for dinner, to how much you pay on your credit cards, you “satisfice” all day long without thinking about it.

Simon realized that most people don’t know how to adequately optimize. We don’t know exactly how to find the best choice among all choices. Most of the time, we’re in such a rush that optimizing is actually a luxury, whether it’s deciding where to go on vacation, who to hire, or what career path to take. Satisficing can be a very pragmatic and necessary approach in many cases. After all, you don’t want to experience the “paralysis of analysis” either. Many times it simply isn’t worth it to examine every single option.

The downside of satisficing

Given our tendency to satisfice, more often than not, the best we can get or achieve is just the minimum we’re willing to accept. “I’d be happy with that,” is the approach we take.

It sounds bad doesn’t it? But the truth is, we do it all the time. Herbert Simon believed the reasons we satisfice were fourfold:

  1. We have a hard time actually quantifying what we’re trying to accomplish. Selecting the “best” choice can be daunting.
  2. We usually do not know the relevant probabilities of outcomes. How many times have you been 100% sure of something, only to have it blow up in your face?
  3. We can rarely evaluate all outcomes with any precision.
  4. Our memories are bound by the recency effect. What happened yesterday is more fresh in our minds than what happened 2 years ago, even when the latter is actually more relevant.

How to overcome our tendency to satisfice

Set the bar high. Set standards that you won’t compromise. Start out with what is “right” rather than what is acceptable because you’ll probably have to compromise somewhere along the line. You’d much rather compromise a little when you’re close to a higher standard than when you’re close to just “acceptable.”

What does this have to do with personal finance?

Plenty. Set your standards high when it comes to living within your means. Set them high when it comes to paying down high interest debt. Set them high when it comes to living by a budget. Set them high when it comes to having the right life insurance or car insurance.

In these areas, “I can live with that,” will only satisfy you for a short period of time and may require a much larger sacrifice later on.

Photo by MOmilkman – Darin House

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