Marginal Considerations
Today, we want to discuss decision-making in financial and non-financial situations ‘on the margin’. Gaining a perspective on the ultimate impact of a variety of alternatives on the margin can facilitate decision making and ease concerns about what at first might seem to be very different potential outcomes. Considerations of the true impact that differences of outcomes have ‘on the margin’ can be very helpful in making financial and investment decisions in a way that is too often left unexamined by most people. In fact, it might be liberating to some who find themselves paralyzed with indecision. An example will illustrate what I am talking about.
Jerry and Alice decide to sell their home. They still have a small mortgage balance but figure to make a nice profit. They expect that they will have money left from the sale to put into their investment accounts. With the help of a broker, they list the house for $759,000 with the hope of selling it for about $720,000. After several months, an interested buyer appeared, negotiations ensued, and the buyer made her ‘final’ offer of $675K, still $45K below $720K. Jerry and Alice would net something well below their original goal.
Looking at only the big picture, $675,000 is a lot less than $720,000…$45,000 seems like a lot to give up. Jerry wants to turn down their final offer and keep looking for a new buyer. But Alice demurs, feeling that his analysis is insufficient…we’ll let her continue:
“Listen Jerry, let’s break this down. $720K net of 6% commission gets us $676.8K and $675K net of 6% commission gets us $634.5 so the difference is only 42.3. We have to pay capital gains taxes of 20% on the gain – 720 nets us a gain of 410, 20% of that is 82. 675 nets us a gain of 365, 20% of that is 71 which is 11 less, so actual net difference between the offers is really only 31.3. If we turn down the offer, it will be another three months at least, maybe even six or more, until we sell. We will be paying the mortgage and taxes, 2700 a month. If we find a new buyer and it only takes three months, an optimistic outcome, that is another 8.1 coming out of our pockets. Now the offer realistically is just 23.2 worse net of everything. If we go back to the realtor, who after all, gets nothing if there is no sale and ask her to take 5% commission she probably agrees, now the difference is only 16.5. But the house is sold, we are free of the worries, no more time spent on this, we move on with our lives.
“One last thing, sweetheart, and I mean this affectionately, how much difference will not having that additional bit of money really make? We take the proceeds of the sale, put it into our investment accounts and our lives aren’t going to change either way – not with a sale of $720,000 or $675,000 or even at our original ask of $759,000. On the margin, darling, it will have no impact on our lives or our standard of living so let’s just sell and move on as we want to do.”
Alice’s final point is what really strikes me…what impact will one outcome versus another have on their lives? Will it make a meaningful difference? Once they get over the hurdle of taking a bit less than they want, will they notice the difference or will they be delighted to have finally sold the house and and be free to begin the next phase of their lives? I wager it will be the latter.
The successful retailer that long ago I used to be learned that giving in a bit to a customer was almost always beneficial…what I was giving up in the short run ‘on the margin’ wouldn’t make a noticeable difference and having happy customers who feel like they had been heard paid dividends in spades. So when faced with an impasse in a decision or a negotiation, look at what the ultimate difference will be; how, if at all, will the big picture be changed by one outcome versus another. That perspective will facilitate many decisions and make what appear to be less than optimal outcomes easier to accept.
Critics might suggest that you could take this approach to everything...why bother striving or competing or fighting for anything then? I understand the objection. However, think about how you feel, and how quickly things that you had deemed vitally important quickly lose their strength in the face of a friend’s discovery of a serious illness or a tragic injury to a loved one. Why are we all so quick to change our view? Because in those situations the impacts ‘on the margin’, the possible changes to our lives are really meaningful and what is truly important and impactful is revealed. We see it easily and clearly. And by contrast, minor differing financial outcomes will have little or no impact ‘on the margin’ of our lives and so should not be fretted upon endlessly – make the deal and move on…time is the most precious commodity we have.