I was intimidated by the cost when I hired my first couple of employees. Each time, I hit a wall in the work that we could take on. I would drag my feet in hiring because I anticipated the obligation of regularly paying someone else. Eventually, I would pull the trigger and was surprised each time when I discovered that our revenue nearly doubled.
There’s a psychological effect that comes into play when we think about these sorts of investments. We tend to evaluate a decision based upon what’s apparent or easy to understand. It’s like we’re looking at an iceberg and assuming that nothing exists beneath the surface of the ocean.
As a basic example, consider buying pizza on Friday night. I tend to weigh the choice against the apparent factors:
- Pizza is good.
- It’s Friday.
- It costs $20.
- It’s not healthy.
Sometimes when I get pizza I feel a little guilty about spending the money on it or not eating something healthier. But if we were to take the choice in its entirety we would also need to add to this list:
- Pizza saves us 45 – 60 minutes in cooking.
- Pizza doesn’t create dishes or clean-up.
- Not eating pizza still costs ~$5-12.
- Pizza is a happy break from a healthy diet.
Looking at all the effects, getting pizza occasionally is a pretty good deal- especially when I want a little more time to relax.
As it pertains to growth, new resources in the form of people or equipment are going to boost your capacity. But because the impact is not readily apparent and easily understood, we tend to evaluate solely on the cost.
The trick is to take a step back and look at the decision in its entirety. What’s the whole picture? What are all the likely positive and negative effects?
What would you see if you dived beneath the waves and took a look at the lower half of the iceberg?
Read another example of a gain oriented iceberg fallacy in The Money on The Table.
Featured image by AWeith – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=51789188