Knowledge And Decisions

Because informal decision making is not subject to such organizational requirements as written justifications, varying protocol observances vis-à-vis superiors, peers, and subordinates or the more stringent “due process” requirements found in legal organizations, the process of deciding tends to be less costly. A distinguished economist once observed that Lindbergh’s flying across the Atlantic alone was less of a feat than if he had flown across the Atlantic with a committee.¹ Much of the cost of formal decision making is not a current outlay (in either financial or psychic terms) for the current decision, but rather an investment (again, in either financial or psychic terms) in “insurance” to protect oneself from future costs in terms of personal or business relationships with the other parties to the decision. Avoiding abrasiveness of manner, verbal misunderstandings, misperceptions of intentions, status threats, and the like, are costly. They are obviously costly in time and tension to the individual. They are costly in more directly tangible financial terms to an organization, which must screen its potential decision makers for their ability to meet these requirements, in addition to the intellectual qualifications for achieving a given quality of decisions. Obviously, as the list of requirements lengthens, the suitably qualified supply of people declines, and the pay required to hire them in competition with other organizations increases. These financial phenomena of institutions are essentially outward manifestations of the underlying psychic costs to individuals.

Informal decision making avoids much (though not all) of these “insurance” costs because less “insurance” is needed. In the extreme case, an individual makes a wholly private decision recognized by all to be legitimately within his arbitrary discretion (an individual watching television alone, a bachelor buying food for himself, etc.), and so he need not take any additional action to insure against adverse reactions from others. More commonly, the other parties to the informal decision-making process are already sufficiently familiar with one another, and have formed sufficiently settled opinions of one another, that “insurance” actions and processes are both less necessary and less effective.

In a sense, this conclusion merely pushes the question back in time rather than answers it. It says that informal relationships may involve lower current costs because of past investments in mutual familiarization. This in itself says nothing about total costs over the relevant time span. These total costs tend to be lower in informal relationships because the voluntary interactions that lead to familiarity are often pleasurable on net balance, or the interaction would not be chosen and sustained. For friends, kin, or lovers to acquire a given level of familiarity, sufficient to reduce mutual “insurance” costs by a given amount, is likely to cost less than for a detective agency, a credit bureau or an investigative reporter to acquire an equal amount of personal information. The simple fact that the latter groups must be paid salaries to ferret out information suggests that the pleasure of familiarizing themselves with the subject is insufficient to compensate the effort.

The lower information cost of informal relationships can be illustrated by the financing of small, single-proprietor businesses. Here, the crucial variable in determining the prospects of success of a given business of this sort is the character, ability, perseverance, and other personal attributes of the would-be owner-operator. Banks seldom finance the establishment of such businesses, which are typically financed by the individual himself, and/or his friends, family or neighbors — i.e., all people with lower costs of acquiring the necessary information. It is not literally impossible for a bank or other organization to acquire equivalent information, but the cost of doing so would be far higher. A financial institution could not simply ask those familiar with the prospective owner-operator for an assessment of him, for they would have insufficient personal stake in the accuracy of the assessment to make it reliable, and their probable bias in his favor would not be offset by a bias in favor of safeguarding their own money. More effective methods of acquiring retrospective personal information about investment applicants — or information in advance about the pool of people from whom prospective investment applicants are likely to come — would involve methods (such as electronic listening devices) whose illegality would greatly increase their cost. The acquisition of the same information through informal relationships is of course not illegal, and is therefore less costly for this reason as well as because of the lower psychic costs of interaction among self-selected people.