We Decide One Step At A Time
This is part 4 of answering the question: How do we make decisions in the real world?
One Takeaway
Most decisions aren’t all or nothing, they’re about what happens next. Thinking on the margin helps you make smarter, more flexible choices.
Life is Made Up of Steps
Most of life’s decisions aren’t grand, sweeping either/or moments. They’re incremental. Do I eat another slice of pizza? Stay one more hour at the party? Work a little longer tonight? The way we make these choices—one step at a time—is what economists call thinking on the margin.
Marginal thinking is about the cost and benefit of one more unit of something. It doesn’t ask, “Should I do this or not at all?” It asks, “Is doing this one more time worth it?”
This concept might seem small, but it has big implications.
More Isn’t Always Better
Every decision involves trade-offs, but the value we get from each additional unit tends to shrink as we get more.
The first slice of pizza is delicious.
The second is still good.
By the fifth, you might start to regret your choices.
Even though the slices are identical, the benefit you get from each one drops over time. This is why people stop eating when they’re full and why most of us don’t binge-watch TV forever, even when we love a show. The next unit brings less and less benefit.
How This Shapes Everyday Decisions
Marginal thinking is future-focused. It asks, “What will I gain from one more step, and what will it cost me?”
At work: Is staying late worth the extra pay, or will it cost me sleep and family time?
In your budget: Is spending this $20 now worth more than what it could become later?
In your schedule: Does saying yes to one more commitment help you, or leave you burned out?
This framework helps you evaluate decisions based on where you are now, not where you’ve been.
You’ve Spent What You’ve Spent
Imagine you own an old car. You’ve already spent half your savings fixing the transmission. A week later, the radiator cracks. Do you fix it or walk away?
Marginal thinking says: what matters now is whether spending more will make you better off going forward.
Forget what you’ve already spent. The cost of the previous repair should not influence your choice; it’s gone and can’t be recovered (economists call this a sunk cost).
Instead, what matters now is whether spending the rest of your savings on this repair will make you better off going forward compared to other options, such as buying a different car.
Too often, we get stuck trying to justify past decisions. But wise choices are made by looking forward, not backward. Marginal thinking gives you permission to cut your losses and make the next best move.
Water, Diamonds, and the Value of Things
Marginal thinking is important because most decisions in life are not about choosing between extremes, but about increments. A classic question about water and diamonds helps explain this point. Why do diamonds cost so much more than water when water is essential to life?
It’s not because diamonds are more important overall. It’s because of marginal value.
Water is plentiful. The next glass usually fulfills a less urgent need, such as watering plants or cleaning, rather than sustaining your life (unless you’re in a desert).
Diamonds are generally scarcer than water. Their value remains high because they can be associated with unique uses, like jewelry or industrial cutting tools.
We don’t value things based on the total usefulness of all of the stock of a good in the world (such as every drop of water). We value them based on what the next unit adds to our lives.
If we were given the choice to buy all the water in the world or all the diamonds then buying all the water would more than likely win.
This logic applies to all decisions. We rarely, if ever, face “all or nothing” scenarios like such as choosing between all the water in the world or all the diamonds. Instead, we decide between some specific amount of water and some specific amount of diamonds.
The Bottom Line
We live life at the margins. By focusing on the next step—what it adds and what it costs—you can make smarter, more satisfying decisions. Marginal thinking keeps you anchored in reality. It helps you ignore sunk costs, avoid overdoing it, and focus on what matters right now.