Get to know these four principles of success

Basically, everything has its price. Why? Because of scarcity. If there were no scarcity – if time and money were limitless – there would be no need to exchange through the price-fixing mechanism. do you want a car You have it! want more time Sure, here’s an extra year of life.

Unfortunately, life isn’t like that. you want a car That’s $29,990, thanks. Want $29,990? That’s several years of savings on the average full-time salary after taxes and living expenses. Do you want those years back? I’m sorry, that’s not possible. too bad, isn’t it?

On the plus side, when we exchange our time and money, we can receive goods and services that improve our lives – that bring a “benefit.”

The first tenet of economics is to be aware of these various costs and benefits when making decisions.

As Stevenson and Wolfers summarize: “Costs and benefits are the incentives that shape decisions. They should weigh all the costs and benefits of each choice and only pursue those whose benefits are at least as great as their costs.”

The “opportunity cost” principle

This is the idea that every decision you make is actually a multitude of decisions NOT to do other things.

A decision to go to the movies is actually a cascading wave of other decisions, such as not going for a bush walk, not taking a nap, not riding a bike, or actually not working an extra hour and earning more.

So in your cost-benefit analysis, look at whether you’re going to the cinema, not just the ticket price and whether you can afford it. Also, consider what other pleasurable things you could be doing, and remember that economists count “benefits” not just in pure dollar terms, but also in terms of how much overall happiness different actions bring.

“The true price of something is the next best thing you have to give up to get it,” advise Stevenson and Wolfers.

The “marginal principle”.

Many of us try to decide in advance how much of something we should have in our lives. How many children should I have? How many candy bars should I eat? How many pairs of shoes should I own?

How many shoes should you own? Julie Bishop's red'Resignation' shoes have become an icon of Australian political life.

How many shoes should you own? Julie Bishop’s red ‘Resignation’ shoes have become an icon of Australian political life.Credit:Alex Ellinghausen

Economists advise breaking down such decisions into smaller decisions and – crucially – thinking “on the side”. Have a child and see how you like it. Then you can consider whether the benefits of having an extra child outweigh the costs.

This approach offers the added benefit of better information being granted about the In fact Costs and benefits arising from different decisions.

“Volume decisions are best made incrementally,” suggest Stevenson and Wolfers. “You should break down ‘how many’ questions into a series of smaller or marginal decisions and weigh marginal benefits and marginal costs.”

The “interdependence” principle

This brings us to our final principle, perhaps best suggested by another economist, John Maynard Keynes, with the famous phrase: “If the facts change, I change my mind.” What are you doing, sir?”

life happens. And when this is the case, it affects all possible decisions. Thus, there is no “set and forget” in optimal decision-making. What works in certain circumstances one year may not work for you the next year.

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As Stevenson and Wolfers conclude, “Your best choice depends on your other decisions, the decisions of others, developments in other markets, and expectations for the future. If any of these factors change, your best choice may change.”

So, in summary, if you want to think like an economist: slow down. Breath. Reflect. Evaluate the information provided. Make your choices. Be flexible. Review future decisions in light of new information.

There’s still no guarantee you’ll get it right. Except you’ll be happier if you do.

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https://www.smh.com.au/business/the-economy/think-like-an-economist-learn-these-four-principles-for-success-20230102-p5c9si.html?ref=rss&utm_medium=rss&utm_source=rss_business Get to know these four principles of success

Brian Lowry

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