Personal Decision Making
The Decision Making Process
To make better purchase decisions, a rational, step by step process leads you through defining your needs and evaluate alternatives before making a final choice.
Step 1: Define the problem or a goal you wish to achieve. (What problem is buying this product going to solve?) Once it is identified, you can look for ways to resolve it in a manner that fits your financial resources now and in the future. If you can't define the problem or goal, then perhaps purchasing it would not be a good decision.
Step 2: Gather information on all possible solutions. (How else could you manage the problem without buying this product?) List all alternative solutions and the cost of each. Do not consider sunk costs.
Sunk Costs - An expense that occurred in the past for which money was spent and cannot be recovered.
To make better purchase decisions, a rational, step by step process leads you through defining your needs and evaluate alternatives before making a final choice.
Step 1: Define the problem or a goal you wish to achieve. (What problem is buying this product going to solve?) Once it is identified, you can look for ways to resolve it in a manner that fits your financial resources now and in the future. If you can't define the problem or goal, then perhaps purchasing it would not be a good decision.
Step 2: Gather information on all possible solutions. (How else could you manage the problem without buying this product?) List all alternative solutions and the cost of each. Do not consider sunk costs.
Sunk Costs - An expense that occurred in the past for which money was spent and cannot be recovered.
Step 3: Compare all of your choices. When you make choices, they often involve getting something in return for giving up something else. The trade off results in an Opportunity Cost, or the value of your next best choice-what you are giving up. Part of comparing choices is considering the value of the options that would be given up. When comparing costs, consider time and convenience too. In some cases, convenience may be more important than cost, as long as the cost is reasonable.
Step 4: Making a decision. The wise decision in any situation is the one that best meets your needs, is within your budget, and gives you the most value for your dollar investment. But take your time, you don't want to rush and make a bad decision and waste your money.
Step 5: After you make a decision, then take action to implement your chosen solution. Because you have made a thorough analysis of choices for solving your problem, you can be sure that you have made the best decision you could with the available information.
Step 6: Reevaluate your decision. After several months have passed, reevaluate the decision you made. Are you happy with the decision you made. If not, what are some things you could do next time to ensure you will make a better decision.
Economic Want and Needs
Basic Needs - The Items necessary for maintaining physical life. These include food, water, shelter, clothing, and basic medical care.
Life-Enhancing Wants - Items beyond basic needs that add to your quality of life.
Individual Wants
Beyond the basic, you decide what you "want" based on factors such as your values, personal preferences, income, and leisure time.
Values
Values are the principles by which a person lives. One person may highly value education. Someone else may highly value time with family. You make economic choices based on your values. For example, if you value education, you will probably decide to save a large portion of income for college.
Personal Preferences
Personal Preferences are your likes and dislikes. One person might enjoy a weekend alone in the mountains hiking, while another would choose to visit Disneyland. Based on personal preferences, we all make economic choices.
Income
The amount you earn will influence the choices you make. Discretionary Income is the money that you can spend or save as you wish.
Leisure Time
The amount of free time you have and the kinds of activities you enjoy also affect how you choose to spend your discretionary income. Leisure time is the time you get to spend doing things you like and enjoy.
Factors That Influence Spending
Personal Factors
Personal factors are things that influence your consumer spending choices. They include such things as personal resources; position in life; customs, background, and religion; and values and goals.
Personal Resources
Personal resources include time, money, energy, skills and abilities, and available credit. The more you possess of any one of these factors, the greater your purchasing power. The job skills you possess will affect the amount of money you can earn and, consequently, your purchasing power.
Position In Life
Your position in life includes such factors as age, marital status, gender, employment status, living arrangements, and lifestyle. For example, new parents buy baby products. Women buy different kinds of clothes than men or teens.
Customs, Background, and Religion
Custom - a long-established practice that takes on the force of an unwritten law.
Families may be faithful to customs that they have followed for generations. Religion influences spending such as Christmas shopping.
Values and Goals
Values are intrinsic, and slow to change, but they do change over time. Goals change often. Individual and family values and goals are expressed through choices of entertainment, literature, sports, luxuries, and so on.
Factors That Influence Spending article by Alan J. Liddle
Decision Making Wikipedia
Step 4: Making a decision. The wise decision in any situation is the one that best meets your needs, is within your budget, and gives you the most value for your dollar investment. But take your time, you don't want to rush and make a bad decision and waste your money.
Step 5: After you make a decision, then take action to implement your chosen solution. Because you have made a thorough analysis of choices for solving your problem, you can be sure that you have made the best decision you could with the available information.
Step 6: Reevaluate your decision. After several months have passed, reevaluate the decision you made. Are you happy with the decision you made. If not, what are some things you could do next time to ensure you will make a better decision.
Economic Want and Needs
Basic Needs - The Items necessary for maintaining physical life. These include food, water, shelter, clothing, and basic medical care.
Life-Enhancing Wants - Items beyond basic needs that add to your quality of life.
Individual Wants
Beyond the basic, you decide what you "want" based on factors such as your values, personal preferences, income, and leisure time.
Values
Values are the principles by which a person lives. One person may highly value education. Someone else may highly value time with family. You make economic choices based on your values. For example, if you value education, you will probably decide to save a large portion of income for college.
Personal Preferences
Personal Preferences are your likes and dislikes. One person might enjoy a weekend alone in the mountains hiking, while another would choose to visit Disneyland. Based on personal preferences, we all make economic choices.
Income
The amount you earn will influence the choices you make. Discretionary Income is the money that you can spend or save as you wish.
Leisure Time
The amount of free time you have and the kinds of activities you enjoy also affect how you choose to spend your discretionary income. Leisure time is the time you get to spend doing things you like and enjoy.
Factors That Influence Spending
Personal Factors
Personal factors are things that influence your consumer spending choices. They include such things as personal resources; position in life; customs, background, and religion; and values and goals.
Personal Resources
Personal resources include time, money, energy, skills and abilities, and available credit. The more you possess of any one of these factors, the greater your purchasing power. The job skills you possess will affect the amount of money you can earn and, consequently, your purchasing power.
Position In Life
Your position in life includes such factors as age, marital status, gender, employment status, living arrangements, and lifestyle. For example, new parents buy baby products. Women buy different kinds of clothes than men or teens.
Customs, Background, and Religion
Custom - a long-established practice that takes on the force of an unwritten law.
Families may be faithful to customs that they have followed for generations. Religion influences spending such as Christmas shopping.
Values and Goals
Values are intrinsic, and slow to change, but they do change over time. Goals change often. Individual and family values and goals are expressed through choices of entertainment, literature, sports, luxuries, and so on.
Factors That Influence Spending article by Alan J. Liddle
Decision Making Wikipedia