Everything Costs

December 16, 2021

I have been lucky enough to work — mostly — in places that are primarily motivated by accomplishing something. How interesting that something actually is can vary quite a bit, but compared to organizations that work simply to maintain the status quo, or divide up the spoils of some long entrenched operation, most of my jobs have been comparatively idealistic. We will make this software, we will find these people, we will share this story, we will grow, and build, and succeed to a greater extent than we did the year before.

This is mostly a good thing, which is why I continue to try to spend my time working with these kinds of places. But it generates a specific kind of challenge, one that I’ve been dealing with for most of my professional life.

That challenge is… cost denial.

What is Cost Denial?

Cost denial is a term I just made up about ten seconds ago, sitting in this coffee shop. But, more importantly, it’s also a form of bias that’s — sort of — the opposite of loss aversion.

Disclaimer — I am not an economist, or really any kind of scientist, nor especially good at math, or, if we’re being honest, reading. Like many people, I have read scrolled through interesting listicles about logical fallacies, and it’s possible I’m basically describing one of those. Either way, I want to establish a definition here so my examples and conclusions make as much sense as possible. So… sorry not sorry.

So anyways, yeah, cost denial. It’s actually not really the opposite of loss aversion, because that would just be preferring gains to avoiding equivalent losses, which is probably just a description of FanDuel’s business model, and not that interesting. Instead, I’m talking about cost denial, which is seeing the upside or potential gains of something and either denying or not understanding the existence of either the risks, or more likely, just the straight up costs of seeking the gains.

One of my favorite youthful exuberance stories is about a trip I took with my friend Jeff to see Wyclef Jean in concert, and yes that is a sentence I just wrote. It’s not a complicated story — we were driving on the highway to get to some faraway amphitheater, and missed our exit. This was way out in the middle of nowhere, so the next exit was several miles away, and of course we were late because we were a couple of dumb 19 or 20 year olds in a Ford Escort. I was stressed out by the situation, but Jeff wasn’t. He got into the high speed lane, put his left turn signal on, turned onto the giant grassy median, and did an incredibly illegal u-turn on a major highway while I screamed “RISK ANALYSIS!!! RISK ANALYSIS, JEFF!!!!” and gripped the cupholder next to me for dear life.

Nothing bad happened to us, and we weren’t late to see the local opener for Wyclef, thank God. But what was funny about the whole thing was the way both of us thought about the situation. I was screaming at Jeff to reconsider the cost-benefit analysis of doing a U-turn on a major highway to avoid being late for a Wyclef concern, but that didn’t work because even when he reconsidered it, Jeff simply didn’t see the same costs I did.

Life as a Series of Highly Illegal U-Turns

When this happened twenty years ago (and for some time thereafter), I wasn’t able to articulate what really bothered me about Jeff’s decision making in that moment, so I simply wrote off this and other debacles as “sometimes my friend decides to do idiotic things”, and he probably wrote off my thinking as “Nate worries too much”. Neither of these things are very good descriptions of what I now think — after working with other people for years and years — was actually happening.

In fact, just like at work, Jeff and I were basically talking past each other. Jeff, like a lot of startup founders/employees, was thinking about the opportunity at hand. He felt like he had a perfectly good command of what was going on — very light traffic, a sufficiently flat median to cross — and felt confident he could achieve the available gains without paying a price, despite having very limited time to assess the situation, consult others, etc. And… he was right!

I, on the other hand, was thinking about something different. Namely, what is the cost of generally making decisions in this way? It’s not so much that I thought “this situation is extremely dangerous”. I didn’t think that then, and I don’t really think it now. But what I do think is dangerous is a general tendency to act impulsively in response to making a mistake.

So while it probably felt like I was saying “why are you making this u-turn?”, what I really meant was “why do you choose to operate this way?”

With the benefit of hindsight, I now think this is a classic example of cost denial. In this case, it required looking at every example of doing things a certain way (impulsively, in response to error) individually, and not in the aggregate. You then write off the things that don’t work as outliers, and use the things that did work as justification for the lack of cost. In reality, if you zoom out, it’s much easier to see the overall cost (and benefit!) of acting either “impulsively” or “decisively”, depending on how you want to look at it, but this kind of cost denial prevents most of us from doing that when we’ve already decided we prefer acting one way or the other.

To be fair, you can probably guess that I’m a little more cautious than other people in my scenario, which means I have cost denial issues of my own. These usually manifest in me obfuscating away the cost of inaction, BUT, I’d like to think that over 15 years of professional work has given me an opportunity to correct that a bit, especially since it’s a known issue and I work on it. You’re reading the guy who once authorized thousands of dollars to get the Plain White Tees to play at a work event. I’m willing to shoot from the hip from time to time.

Benefit/not-Benefit Analysis

When you work at early stage companies — especially ones with venture backing — growth often fixes everything, at least in the immediate term. If you’re growing but losing money, someone will usually give you money, or even buy your company. If you’re not growing, or that growth is slowing, you’re in trouble. There’s a place for this mindset, but again, it does have a tendency to create a certain kind of opportunity bias. When I worked at FiscalNote, we literally had a company value called “Bias for Action” (I think we had something similar at Contactually) that meant when we weren’t sure of what the downside of something was, but we felt good about the upside (or at least not bad), we’d often go ahead and do it. This is really common in venture startups, because standing still is death, and moving slowly isn’t much better. You’re burning cash and the clock is running. Something needs to HAPPEN.

This is all well and good until you get some traction and start growing. At some point — usually 50-100 employees, maybe a little more, your organization becomes your biggest problem simply because now there are too many people doing too many things and pulling everything in different directions. Well-intentioned, usually inexperienced founder-leaders will come out and say something like “OUR UNIVERSAL GOAL IS THE CUSTOMER EXPERIENCE, IT’S OUR OBSESSION AND EVERYTHING IS UNIFIED AROUND THAT”, but that’s obviously meaningless as a true guiding device because there are a million things you could do to improve the customer experience and many of them will make that experience better in one way and worse in another.

So instead what happens is people bring ideas to other people (like me) that have some sort of upside, and say “let’s do this”. The first thing I ask, either literally or figuratively depending on the request, is “what is the cost of this.” The ideas I am the most interested in are ones that have a very clear, often large cost, like deprecating a product line, or focusing on a smaller subset of customers. I’m interested not because I like getting rid of things (although sometimes I do), but because it’s at least plausible to me that something with a large cost ($$$ or otherwise, but usually both) could conceivably have a large benefit, whereas most things that appear to have no cost either have no benefit, or more likely, have a secret, very large cost you will have to pay later at an incredibly inopportune time.

Given that most people’s understanding of marketing departments is “those guys sure waste a lot of money”, you’d think there would be a healthy appetite for discussing the cost of marketing activities. But there usually isn’t, outside of raw channel dollars. Product and development teams tend to have a pretty clear license to say things like “if we build this thing you want, there will be an ongoing cost to support it”, but for some reason that never seems to come up in marketing, or if it does, it’s quickly hand-waved away because we need to act, dammit.

Cost Denial in Society

I’ve been talking a lot about cost denial at work because it’s a pretty sterile way to feel out the concept. But I actually worry much more about cost denial in society, especially nowadays. A lot of the “move fast and break things” concepts that were born in the web software era have metastasized into general society at large, and many of the people who were so eager to bring that mentality to the world are either moving on to other things or just cruising around in space lighting money on fire. But the resulting problems are very real, and the costs we’ve denied even existed for so long are now here.

In fact, I read two Washington Post articles this week that I think are horrifying, existential examples of cost denial coming home to roost, either right now, or in the near future.

  • First, there’s this exhaustive breakdown of how investment funds are taking over huge swaths of what used to be starter homes for families. Back in 2008, these (already rich) guys all thought, hey, this is great. Huge upside! And a policy world of financial deregulation had already decided to focus on the upside of a fat, healthy investment market without considering the (then probably unclear) downside of all these assets being owned by for profit funds, instead of non-profit families. Well, guess what? There are costs — not just dollar costs (passed onto renters), but secondary social costs that come from fewer people building any family wealth or being able to afford to own a home. And those costs not only suck, but were also certainly ignored/dismissed when this entire thing was originally conceived.
  • Next, there’s an even more chilling deep dive into child trafficking conspiracies and how they affect both the people who are inaccurately included in them (as victims or perpetrators), and the actual, real-life process of helping people trapped in real trafficking scenarios. I’m sure we’re all exhausted with yelling about social media deconstructing basic elements of our society, but what you’re seeing here is the impact of saying “what if random individuals could immediately create huge, informal, leaderless organizations with massive reach” and only seeing the potential upside. Now we’re here, and we have no idea how to keep these things from destroying people and undermining actual functioning parts of society while the guys who did this have moved on to wearing goggles over their faces and designing legless avatars.

So, to wrap it up… remember, cost denial is NOT about arguing over the costs and benefits of something. We all do that, costs and benefits can be subjective, that’s all fine. Instead, it’s about denying the existence of a cost at all — i.e., that it is abjectly good for people to be more easily connected, or that a freer market is inherently more efficient AND, assuming that is true, that a more efficient market is the primary, defining characteristic of a world we want to live in.

As a person who spends his work days trying to make helpful over-simplifications, know that these are dangerous over-simplifications, and in all likelihood were put together by people who knew better, and chose to live in a personally profitable fantasy world instead.

Merry Christmas.