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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
ultra-modern 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 programmes 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 programme 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% interest. ‘That’s much better than the 1%
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
than 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 centre, 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 tumour that will kill you in five years. He proposes a complicated
operation, which,
if successful, removes the tumour completely. However, this
procedure is highly risky with a survival rate of just 50%. How do you decide?
You weigh up your choices: certain death in five years or a 50% 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 tumour 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 tumours 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.
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