Satisficing Can Optimize Your Time and Energy
In corporate finance, the application and measurement of what’s good enough is called satisficing. Remember that old saying time is money? Well, come to find out that people naturally apply a value to their time. This value isn’t so much about money as it is about using your limited amount of time doing things you either need to do or would rather be doing.
For a simple example, imagine that you’re spending your day off playing video games, and you just can’t take time away to go cook dinner. So you decide to order a pizza. You could probably make something healthier, cheaper, and more delicious, but you settle for something that’s good enough and doesn’t require any additional time or effort on your part.
Satisficing, in a more practical sense, refers more to our inability to know what is truly rational. Say that you own a dog-wash. When you’re shopping for flea powder for your customers’ dogs, you probably don’t know what price every store in the city charges so you just go to whatever store you’ve been to before, believe to have prices reasonably below retail, or with whom you have a working rapport.
Even if that store doesn’t have enough flea powder, most likely you’ll end up buying whatever they have available with the mindset that you can always go back out when you run out. The store down the street has plenty and it’s actually $1 cheaper per box, but you don’t know that and you don’t intend to run around the entire city.
Why? It’s because the measure of time it would take to fully collect all the information and resources required to make a rational decision aren’t available. In the time it took you to go back out and pick up more flea powder, you would’ve been better off going to the other store, but being unaware that the other store even had flea powder you determined that this was good enough for your immediate needs.
This could be applied to an employee who doesn’t have anything else to do, so financially their time is theoretically worthless. This person places a certain value on their time that they would rather be doing something other than figuring out what the flea powder market looks like.
Note that in both examples, satisficing behavior is causing people to make less-than-optimal decisions, but they did so based on the decision that their time was worth more than the potential benefits. As with all financial decisions, satisficing comes with a degree of uncertainty and risk, so the results can be good or bad.