January 1, 2021

Actualism: When It Pays to Accept Second Best

If I am trying to eat healthily, I know I should try to cook more at home. I also know that brown rice is more nutritious than white rice. I don’t like the taste of brown rice as much, but a lot of healthy-eating advice encourages me to choose whole grain foods like brown rice over their more processed counterparts.

So I buy brown rice. And when it comes to dinner time, the thought of eating brown rice is so unappealing that I reach for my phone and open DoorDash.

Two choices lead to three possible outcomes

If I am trying to build wealth, I know I should start investing some of my disposable income in an index fund. I’m a bit intimidated by managing my own portfolio so I think about signing up for a fully-managed service like Betterment. But I know that behind the scenes the funds are the same anyway and I will save money if I do it myself.

So I don’t sign up for Betterment. But the thought of trying to understand how Vanguard works and what all the different financial terms mean seems so overwhelming that I keep putting it off, and my disposable income sits idle in my bank account indefinitely.

In philosophy, there is a debate between possibilism and actualism. From the Stanford Encyclopedia of Philosophy:

Suppose that you have been invited to attend an ex-partner’s wedding and that the best thing you can do is accept the invitation and be pleasant at the wedding. But, suppose furthermore that if you do accept the invitation, you’ll freely decide to get inebriated at the wedding and ruin it for everyone, which would be the worst outcome. The second best thing to do would be to simply decline the invitation. In light of these facts, should you accept or decline the invitation?

Possibilism would say: Go to the wedding. You should be trying to achieve the best possible outcome, which is to go to the wedding and behave.

Actualism would say: Decline the invitation. You know what will actually happen if you go to the wedding, and it’s worse than the second best option of not going.

This seems to be a pretty common pattern in life: It appears like there are three options: the best (1), the second best (2), and the worst (3). Of course, you try to get (1), but you end up with (3). Little did you know, (1) was never really an option, so you should have just gone for (2).

It turns out there were only two possible outcomes

An important part of personal growth, I think, is to get good at predicting when you should think like a possibilist and when you should think like an actualist.

Sometimes, it really does make sense to shoot for the best outcome, even if there’s a chance you could end up with the worst. But I suspect most people err a little too much in the possibilist direction (that’s why those cash-rebate schemes exist: everyone thinks they will be the one who will actually mail in their receipts… and then they don’t). Taking a more actualist approach involves being honest with yourself about what you actually will and won’t do. Getting better calibrated at this is a valuable skill.

For the examples above, I now know that I should just accept the second best option. I buy white rice, accepting the slight loss of nutrients in return for a meal tasty enough that I’m not tempted by takeout. I have a Betterment account, accepting that I am leaving some value on the table in return for actually getting some return on my money at all.

You’ll often encounter people who just can’t understand why you’ve settled for the second best thing when you could have the first: But think of all the compounding interest you could be getting on the money you’d save by managing your own portfolio!!”. They think the choice is between investing via a fully-managed service or investing via a self-managed service. They don’t understand that the choice is actually between investing via a fully-managed service or not investing at all.

A parting thought: While it is valuable to be pragmatic about what you will and won’t actually do, you should also retain a growth mindset - just because I can’t handle managing my own portfolio right now doesn’t mean I never will - at some point I may decide it’s time to take the plunge. It’s helpful to occasionally run experiments just to see if you’ve reached a point where option (1) is in the running for you again. But in the meantime, a suboptimal thing you actually do is better than an optimal thing you don’t do.