Once upon a time I was a VP at a bank that no longer exists, but was prominent, and saw decisions being made the same way about whether or not to build a custom

Once upon a time I was a VP at a bank that no longer exists, but was prominent, and saw decisions being made the same way about whether or not to build a custom system or buy a vendor based system. Banks can gain a significant advantage over their competitors if they can build lots of great, custom stuff. Goldman has guys that build custom JVM's, for example. The vendor based system promises to deliver some level of infrastructure and some level of completion for a project right out of the gate. It was fascinating to see the discussion happen. The bank was considering two vendors. One wanted to sell their system for $10M and the street viewed it as having excellent quality. The other vendor was willing to sell for $5M and there was work that would have to be done at the bank to complete a lot of the project. The bank chose the cheaper vendor, thinking they could build logic to fill the gaps for less than $5M. Scope creep eventually came in and the project turned into something that the bank spent well over $100M on. The project was not complete by the time the bank collapsed, but our new owners took the project on and spent more money on it. $100M didn't seem to bother anyone as long as the people using the systems made a lot more than that. And to think, the decision was originally made based on whether or not they wanted to spend an extra $5M... It was said that the more expensive vendor was an order of magnitude better, so the squabble over $5M really seemed silly in retrospect. Chris's point is similar to the lesson I learned at this bank. The lesson is that economics is a study based on relative notions, not closed systems. If you look at just the raw numbers, you might be coerced into bad decisions. I suspect we could've gotten better work done if we were on the better system. I think this point can also be observed in the sale of Instagram to Facebook. Consider the balls on that team to ask for so much money! At first many folks said, "$1B!?" But if you break it down into a percentage of what Facebook was worth at the time (~1%), the numbers seems much easier to swallow. 1% of Facebook for the fastest growing competitor seems reasonable enough to me.