People do things for reasons.
The reasons are the benefits you get – the things you have gained, are gaining or expect to gain from taking a particular action.
All these reasons and benefits, the associated hopes, dreams, goals, objective, prizes, are packaged by economists into one, rather dull word – utility.
Utility is what’s in it for you.
Understanding how utility is created is crucial when trying to make a decision, or when getting someone else to make a decision.
One way of doing this is by drawing a utility tree.
For example, around this time of year, many families are thinking about options. They want their kids to go to a good school – but what should they do?
Say they have to move – and they have two options. They can buy a place or rent a place. If they buy, they can buy a big house or a small house. If they rent, they can settle for an OK house.
Whether they buy or rent, as long as the house is in the right area, they are fine for schools – so the outcome is the same in all cases.
What makes the difference when choosing between the options for this family?
Lets say one partner wants a big house. The other, more familiar with their finances, doesn’t want the associated costs because they will stretch them too much.
A smaller house would make one partner happy, and the other could deal with it – but it’s not a preferred option by any means.
Both of them, however, really don’t want to rent again and deal with the issues of agents, commissions and having to have regular inspections.
These reasons are the utilities associated with the situation.
Now, if you keep all this in your head, it’s really hard to have a mature discussion that doesn’t end up in an argument.
Instead, drawing a utility tree helps to make the options, outcomes and utilities involved clearer.
The key thing is to consider each option you have by itself, using the same criteria to evaluate each option and making sure that you look at it from enough points of view to be happy you have thought through it properly.
For example, seeing the tree in the picture above clarifies the situation more than describing each person’s point of view in words.
The point of view someone takes, their perspective, is crucial in being able to understand what will and what won’t move them.
We can often only see things from our point of view.
Making good choices, however, whether in personal situations, when making investments or when persuading someone else to make one, often need you to see things from another person’s perspective.
What this also means, quite often, is that the best solution will need to be a compromise. For example, you might be able to persuade your partner to have a smaller house, as long as you can also have a nicer car.
Understanding utility simply means that you can better understand what people want and what they will do – and that means you are more likely to get what you want as well.