Options
Options are feasible courses of action that a decision maker can compare using utility analysis. Define each alternative clearly, include relevant combinations, and account for all relevant chance outcomes when evaluating it.
THE IDEA
Options
Utility analysis ranks possible actions according to the decision maker’s preferences. Buying, selling, moving, and staying are examples of actions. For a particular decision, define each option precisely enough to compare its benefits, costs, and uncertain outcomes. A combination of actions can itself be an option if it is feasible.
The jelly bean example needs a distinction between a choice and an outcome. If a player chooses which color to bet on, betting on red, yellow, or green can be alternative actions. If the player simply draws a bean at random, the colors are chance outcomes; the decision is whether to play, or which wager to buy.
Suppose a second jar contains many colors, but prizes are paid only for red, white, or blue. An analysis of the wager must include the possibility of drawing another color and winning nothing. You need not examine every conceivable strategy, but omitting a relevant losing outcome would overstate the value of playing.
When to use it
Choosing between job offers by comparing each job’s salary, location, and opportunities for career growth.
Comparing feasible investment allocations, including combinations of stocks, bonds, and real estate, by their risks and expected benefits.
Selecting a college major by weighing personal interests, job prospects, and educational requirements.
Comparing competing products or configurations using features, benefits, and costs as criteria.
FROM THEORY TO EVERYDAY LIFE
In practice
Jelly Bean Wagering
If a player chooses a wager on red, yellow, or green, those wagers can be alternative actions. If the player only draws randomly, the colors are outcomes. Utility analysis compares the available wagers or the choice to play, taking their possible outcomes into account.
Multicolored Jar Scenario
In a jar with many colors, only red, white, and blue earn prizes. Drawing another color is a losing outcome and must enter the calculation. Restricting attention to winning colors would overstate the wager’s value.
A MOMENT TO REFLECT
Put it to work.
Identify a current decision you are facing. List all possible options and check if they are mutually exclusive. Could combining some options create a better path?
Consider a situation where you might be ignoring relevant options. How can you ensure your set of options is not too narrow?
Think of a complex decision you made. Did you systematically compare the advantages and disadvantages of each option separately? How might utility analysis have helped?
CONTINUE THE CONVERSATION
Source texts
- The Thinkers Toolkit by Morgan D Jones