How Businesses Make Decisions
A common criterion used for making a decision about investing in a business project is called the Cost-Benefit Ratio. A nearly identical concept is called Net Present Value (NPV), which is the difference between the projected earnings of a project compared to the cost of generating those earnings.
A positive net present value means that the projected earnings generated by a project or investment exceed the anticipated costs. In short, a project with a positive NPV will be profitable.
This NPV applies to complex projects and to simple decisions. Let me illustrate one: Let’s say that you own an oil tanker. The law specifies how the ship must be equipped and maintained in order to be certified as seaworthy and able to carry crude oil. If you violate these extensive laws, they will fine you up to $1 million.
Ah, but you discover that properly upgrading and maintaining the tanker will cost you about $5 million each trip, so the Net Present Value of this one decision—equipping and maintaining your ship—is NEGATIVE.
You would be strongly motivated to not maintain the ship, and just to take a chance on the rare inspection costing you $1 million, while profiting $5 million on each trip by eliminating upgrade and maintenance costs.
Without any consideration of the environment or morality, you would decide—based on NPV—not to maintain the ship. If the government made the cost of poor maintenance high enough, though, ship owners would maintain their ships, simply from calculating the NPV.
Using only the criterion of making money, the bottom line is this: If you make more money doing something wrong than it costs to get caught for doing that thing, you continue doing it.
Stopping Unproductive Behavior
How selfish is that? And yet that is exactly how many businesses operate. They knowingly violate the law because breaking it is more profitable than keeping it. More significantly here, THAT is often how your children make decisions.
You set a rule, for example, that not doing a chore will be penalized by the loss of electronics for a day. But then you actually enforce that law only occasionally. Mostly unconsciously, children quickly learn that mostly they can do what they want and ignore the rules.
Only occasionally do you impose a consequence, and even then you water it down and make it smaller. The kids do an assessment of Net Present Value, and decide that the value of what they have—doing what they want, enjoying freedom and power—is worth more than the occasional consequences.
And THIS is why we must be absolutely consistent about loving and teaching, which includes consequences. And consequences must be unpleasant enough that a child will do a NPV calculation and quickly decide that keeping the rules is more profitable for them.
Remember this when you’re confronted with a pattern of unproductive behavior in a child. If you don’t consistently make the consequences sufficiently negative, the unproductive behavior will continue.
We have to help our children make their decisions, and consequences are one way to do that.
