The urge to do everything faster and better is risky. Far wiser to do what’s good enough for the range of possible futures
We worship efficiency. Use less to get more. Same-day delivery. Multitask; text on one device while emailing on a second, and perhaps conversing on a third. Efficiency is seen as good. Inefficiency as wasteful.
There’s a sound rationale for thinking this way. Economists teach us that increased efficiency is the major way to improve our standard of living. If your company gives you a pay rise without becoming more efficient, it will also have to raise its prices to make up the shortfall. If all companies do the same, everyone ends up running in place – you’ll need your higher wages to match the higher prices of the things you buy. So, if we want to make material progress, we must become more efficient. Streamlined supply chains, just-in-time deliveries and no slack in the workforce all serve to raise efficiency. Achieve this, and all our lives will get better and better, or so we’re promised.
For automobile manufacturers, who wish to squeeze as many miles per gallon as possible out of their car designs, air resistance and the grab of the road are the enemies of efficiency. In the world of finance, it is at the point of exchange that most friction arises. Before money, the potato farmer had to use sacks of potatoes to trade for eggs and milk. As the British historian Niall Ferguson reminds us in his book The Ascent of Money (2008), the invention of money went a long way toward reducing this inefficiency, and much that has happened in the financial world over the past 200 years can be seen as a continuation of that revolution.
Credit, for example, meant that you could go shopping for eggs and milk even without having the money right now. Financial markets have since taken this efficiency to another level. The creation of ‘option markets’ means that you don’t have to go to the trouble of buying a stock that you’re going to be selling soon anyway. You can just promise to buy it, and then sell it at a price and date specified by the option contract. And then you can trade the option rather than the underlying stock.
Each of these developments and many others have made it easier to do one’s business without wasted time and energy – without friction. Each has made economic transactions quicker and more efficient. That’s obviously good in some ways. But the financial crisis of 2008 suggested that maybe there could be too much of a good thing. If mortgages and other loans hadn’t been transformed into tradable assets (‘securities’), then bankers might have taken the time to assess the credit-worthiness of each applicant. If people had to visit a bank to withdraw cash, they might spend less and save more. This is not mere speculation – for instance, research reviewed by the Nobel Prize-winning economist Richard Thaler shows that people will pay more for an item with a credit card than with cash. Arguably, a little friction to slow us down would have enabled both institutions and individuals to make better financial decisions.
A decade ago, the American psychologist Adam Grant and I argued in a journal paper that this ‘too much of a good thing’ phenomenon might be a general rule. Some motivation produces [ … ]