Some of the most useful things I’ve learned are insights from the core of economics.
Opportunity cost. Do x, and you can’t do y. Every positive choice is a choice to give up something else. Decisions matter – we should think harder about what forego when we spend our time or money in one way rather than another.
Incentives. Incentives motivate our choices. Some of my friends hate this idea — they feel it makes us selfish. It does no such thing. Incentives include many more goods than money — for better and for worse. People can be motivated to do good things for others and even to sacrifice themselves for higher ends. People’s incentives can also come in the form of belonging to a tribe or feeling superior to an outsider. What can’t motivate them is . . . nothing. That would simply be random behaviour. Understanding the people around us becomes much easier (if not always easy) when we get what drives all of us.
Preferences – your utility function. What motivates everyone is different. Each of us has our own utility function. Some of us are hyper-social and some are loners. Some prefer time over money – at least, after a certain point –, and some people always take the money. A large, complex society will always promote certain values, goals, and, in a consumer society, goods. It’s important to know your own utility function. Work for your own goals, not ones sold to you.
Sunk costs. Bad economic project? What you’ve already invested is no reason to carry on. If an economic asset can’t be fixed or sold, shutter it and start again. There is an (inexact) analogy in life. How many people stick with jobs, relationships, and lifestyles that don’t work for them simply because they feel they have invested too much to walk away?
Margins. An additional $10,000 is worth a lot to most people and not so much to someone for whom it means the cost of a few facials at the Dorchester or a bottle of wine. To understand the importance of something – its weight – context matters. Marginality has obvious applications with money but where I see it under-estimated most is with time. A friend, speaking about retirement, talks about all the time he’ll have to while away. As a proportion of the quality time left to him – assuming he retires in his 60s – his time will, in fact, be more valuable than ever.