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Financial Decision Making: Avoid the Binary Trap

  • 2005 14 Mar
Financial Decision Making: Avoid the Binary Trap

In our last article, we discussed the value of starting with a blank slate when making an important decision. This month we want to look at how to avoid falling into the Binary Trap.

"The Binary Trap" is when you have a decision to make and you limit yourself to only one option. It is generally defined as a "yes" or "no" decision. Asking the question, "Should I buy a new Honda van versus keeping the old one?" would be a good example of a binary trap.

The key to avoiding the Binary Trap in decision making is to weigh your priorities/objectives versus multiple choices, not limiting the choices to one option. In deciding to purchase the new Honda van, another alternative might be to fix the old van. Or how about a used van? How would those options fit with your objectives?

A few years ago, a client called me because he and his wife were trying to decide, with their son, if he should go to a large prestigious university to which he had been accepted and given a partial scholarship. A great opportunity! However, was this one school the best for their son? They were excited but also had reservations regarding a few issues. They were caught in the Binary Trap as they had not examined other options.

To help the client out of their quandary, we encouraged them to develop a decision matrix which would possibly surface other options, clarify their objectives and give them a quantitative way to evaluate the decision. Steps to developing a decision matrix include:

1. Define the decision. In the case of choosing a college, the decision is "Which school is the best for our son?", not "Should we go to the large school and accept their scholarship?"

2. List your objectives down the left side of a piece of paper (spreadsheet, etc.). In the case of the client, their objectives included school size, cost, location, values, etc.

3. Assign a weight to each objective on a scale of 1 to 5, with 1 being of least importance and 5 being very important. Also, sharpen each objective. If location is the objective, then define the ideal - less than 50 miles, away, etc.

4. List all the various alternatives, not just one option, across the top of your paper. For example, do not only list one school - a state school could be added, a community college, other private schools, etc.

5. Evaluate all the alternatives against the objectives. If the objective of location is rated a "5" and School A meets the criteria, give it a "5". If school B does not quite meet the objective, assign it a "3". If school C in no way meets the objective, give it a "0". Don't assign more than the value you have placed on the objective. If an objective has a value of "2", then do not assign more than a "2" to any alternatives in question.

6. Add up your scores for each alternative and you have your answer - at least according to this method.

Once you have added the scores, you will likely have one or two options that might rise to the surface. The last step in the process is to ask the risk question: "What is the worst thing that can happen if I make this decision?" Once you answer that question, then ask: "What is the probability of this happening?" If you were evaluating various methods of travel and flying scored the highest, you would then ask the risk question. The answer to the first question is of course that the plane could crash - not a good thing. However the answer to the second question is that the probability is minimal and likely better than the other methods of travel. So in this case you would choose to fly.

There are numerous ways to make good decisions without making it overly complicated. The key is simply to use a method that weighs your priorities against your choices. My wife and I recently made a housing decision and we had listed 30 priorities. We did not have time to weigh all the priorities and then score each one for each alternative. We simply listed the choices and then assigned a number to each priority under each option based on how well it fit - 1 being not at all and 5 being a perfect fit. After doing this, one option clearly stood out. However we wanted to make sure the most important things were not getting lost, so we took the five most important priorities and did the same thing. Again, we had the same result. For us, this exercise confirmed our thinking and gave us great confidence in our decision.

No method of decision making replaces prayer and the peace provided by God, but a method like this can help you get down the path of the decision to be made.

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