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What are cheap alternatives? In my case is any airplane flight by Delta or Ryanair. Other examples of such products or services are: winter clothing, sport apparel, laptops, designer and architect services. All of them are high in cost (and can’t be consumed periodically), however you can find cheap alternatives, that for some people might be good enough. The big dilemma is not how much you are saving, but are they really cheaper or good enough? Evermore, is how big is the risk compared to the benefit of finding out if they are good? Here is example:

Recently I took a transatlantic flight with Delta (part of it operated by Air France), from Sweden to Honduras and back. At the moment, this was was the cheapest flight I could find. Overall, the services was really bad compared to my previous flights with British Airways. First, the planes that took me from Paris to Atlanta was uncomfortable. Clearly the design of the seats and screens was not for long haul flights. Second the stuartists where not as friendly, however the worst thing is that when going and coming back, my luggage was delayed one day. In Honduras I had to go to the airport and pick it up the next day, in Sweden it was delivered to me. It was pain, it was inconvenient and the risk of me losing my stuff got higher. What will had happened, if my luggage was lost? Means that the trip will have actually cost more than a proven but higher in cost, such as British Airways.

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Was my case a anomaly? I don’t think so. I was warned before about Delta delivering the luggage  a day after. My theory is that this saves them “fuel money”, by sending the heavy luggage with other airlines. However, me elaborating on it will derailed me from the point of this post. Which is:

Companies that offer you a cheaper alternative in a competitive market, generally will  shave indirect costs from other places, which will contribute to providing a cheaper alternative, but lower in quality.You will not be able to find out how bad the quality is, until you used it.  Or sometimes they just sell you the most basic and functional part of it and charge for all extras.  Same happens with winter apparel. Cheap jackets could only last for a couple of winters, then you will have to buy a new one. Also with architects and constructors, sure they can build you a house at half of the market price, but at the end your house or flat will have more deficiencies if you agreed to pay the market price. At the end of the day companies discriminate their customers through prices: you want the good stuff, pay for it, if not then settle for the minimum and any goodies will cost you.

The dilemma is that sometimes you just need a jacket for a winter, or the inconvenience of the Delta service is just for a few hours. Tolerance becomes a habit and we start to make excuses for the companies! We consider them for the next time, instead of demanding high quality service.  Yes! It is also hard to complain to customer service and demand something back. Also, is so hard NOT to save 300 USD in a flight. Or we like to “gamble” and see if we are one for the lucky ones that get the mediocre experience (instead of the bad one). Like once I was told in a Negotiations workshop: humans are not rational beings.

Next time you are juggling with a decision on purchasing a cheaper alternative, ask yourself this: can you afford to buy the cheap one and the expensive one at the same time, because that is what most of the time we end up doing and worst is that we feel unsatisfied.

Approximately a month ago, I finished reading “Good in a Room“. Like most of those books they use real life cases and stories to keep the reader interested. In one of the stories of a “financial advisor”, the author uses a metaphor of a window being broken several times by some kids playing. Maybe it  really “sticked” to me, because of the simple way to describe risk or since it made me remember “the good old days” (I used to break a lot of stuff when a kid.. and still do). Anyways, here is the trimmed version of the metaphor:

Imagine that you have neighbor with a nice patio and kids. The kids like to play baseball and more often than you like, the ball ends up breaking one of your windows. You are getting kind of tired of replacing the window, every time the kids hit a “home run”. So, instead of having a window with one big glass, you could divided in a four piece crystal window (see image bellow) . The next time the ball hits your window, you will only need to replace one of the squares and not whole window.

The metaphor show a way of managing financial risks in your investment portfolio, or even how you should distribute your savings. What if your bank bankrupts today and you have 100,000 USD, but the bank guarantees your deposits up to 35,000 USD. Suddenly, you just “lost” 65,000 USD and it will be some time before you get them back. By distributing your savings in various banks, first you are closer to the deposit guarantee (that each bank might have). Second if one of you banks bankrupts you have your money in the others. Thanks to the this strategy of managing (or distributing) the risk, you hare able to take better decisions, while minimizing lose.

I love it because simplifies risk management and is more appropriate than eggs [analogy]. Although with the eggs and basket you may say, “yeah I can spread my 30 the eggs on 7 baskets”, the analogy doesn’t take into account if you “exaggerate” with the distribution,  is not a good idea as “common sense” may tell you. While you minimizing the probability that all your recourses are lost by distributing your in many places, managing that distribution also consumes resources. If not clear or convinced, lets go back to the window and dividing it in 16 squares. Are you making it more difficult to change a single square or elevating the probability that while putting a new square, the others may break? Well if the window is big enough 16 squares is not bad idea, but if the windows is small, getting those small pieces of crystal can make it a hassle. So depending on the size of the window, the more divisions you have, the higher the probability there is that the structure of the window collapses. The key is to find the sweet spot and that depends on the size of “the window” or more adequately, resources.

Risk mitigation, applies in all sort of discipline, from sports, to business, security and programming. Imagine a startup depending on just a engineer to deliver their product,  a team depending on one player or family in one source of income. This is not that easy, there are some many variables, considerations and can change over time. However the window metaphor, helps simplify and get back to the basics. And is sometimes in those basic things, is where we fail.