Tuesday, June 3, 2008


I crave everyone's indulgence as I spend the next few days thinking through some ideas out loud. If you're not interested, you may wish instead to check out photos from last weekend's trail building trip, here, here, and here. You get to see me square dancing, although that may not be any more enticing than reading about ...

Zero-base budgeting! The word "budgeting" just oozes with fun, right?

ZBB was a budgeting fad born in the late 1970s that was most popular in government. The idea was that instead of assuming that this year's budget for your organization would be pretty much like last year's, everything would be up for grabs. The ideological assumption was that would reduce inertia, producing lean, mean, efficient operations. The problem was, in reality everything can't be up for grabs. The biggest problem is transaction costs. It costs time and money to consider alternatives, and that effort may cost more than the efficient alternative would save. Should you replace Park Ranger Bob with a new employee? Someone else equally competent might be cheaper, but then maybe not. It would cost money and time to conduct searches for every employee on payroll, to evaluate replacing all your real estate, to consider entirely new organizational charts. You might as well stick with what you have until a problem pops up.

This is an example of satisficing. "Satisficing" means that most of the time, in most situations, we do not consider all available alternatives, even for very important decisions; we choose the best alternative (or the first minimally sufficient one) among some set of readily available alternatives. I'm not going to date every single man in the United States if I want to get married. I'm going to use some heuristics, or rough decision-making rules ("I am only interested in men who have not committed felonies") and convenience ("I will date men I happen to meet rather than questing in Nova Scotia"). But why do we satisfice? Because exhaustive searches have costs higher than benefits. If I consider every unmarried man in the U.S., I will spend the rest of my life reading resumes and die before I even go on one date. If your state government considers replacing every employee and facility, it will never get around to hiring anyone or buying any property. Heuristics and convenience will result in better cost-benefit ratios than exhaustive searches will unless the number of options are very few. Hence, satisficing is a way of reducing transaction costs. These are costs of taking action or making decisions that are not related to the inherent costs of the product. Paying a park ranger's salary is part of the inherent cost of running a park; transaction costs are the costs of trying to find someone to hire as a ranger. We are willing to pay some transaction costs, but we try not too pay too much.

So, we satisfice on a lot of decisions. Some questions I wonder about:
  1. Why do we sometimes take the first minimally acceptable alternative (for example, looking for a parking space) and sometimes take the best from a pre-bounded set of choices (for example, choosing the most interesting classes that meet graduation and major requirements from among the courses offered next semester at the institution I am currently enrolled at)?
  2. What do we not make decisions about at all, that is, simply accept the status quo on (not firing any professors with tenure)?
  3. How do we set the conditions for a bounded search? For example, every university seems to be short on parking. Administrators faced with this issue will consider buying land or converting green space to parking; placing new lots close to campus or farther away but with shuttlebuses; and constructing garages or surface lots. They are unlikely to consider auctioning all campus parking spaces to the highest bidders or completely eliminating parking while subsidizing the city's bus system.
  4. A lot of the times these bounds could be rationally explained, but in fact we don't go through a rational process to choose them. Registering for all my classes at the same institution is cheaper than simultaneously taking one class in Maine, one in California, and one in Florida. But I bet most students don't consciously think through the economics of being enrolled in geographically distant locales. (Um, that's not a question, I guess.)
  5. What decisions do people in organizations not make that drive other decisions? We don't decide to have staff parking this year, or not to eliminate the website, or to once again admit a freshman class. Therefore, we have to decide how much to charge for parking, what to update on the website, and which applicants to admit.

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