Everyday Economics: Decisions
Updated: Nov 8, 2019
Today's post is inspired by Dan Sanchez. Tonight we had our weekly Praxis Zoom call. Dan had mentioned his love of economics, which awoke the economics geek in me. While I also love the study of economic systems, I will spare the people that do not, (for this post at least). In this, I would like to define and apply two economic terms that I think every person could benefit from knowing and remembering in everyday life.
Perhaps the most well-known term, opportunity cost, is the value of the next best alternative forgone. Also known as the value of the choice you didn't make. Keeping this in mind is a great way to understand your personal value hierarchy. It can be looked at with little things like choosing a hamburger over a hot dog but also can be applied to much bigger things.
For example, deciding to go to college or not. Let's say your top two choices are either going to college for four years where every year costs you $20,000, or you can start a full-time job as a writer making $10,000 per year. The details can vary dramatically, but let's say for the sake of argument, after these four years at the college you would be out $80k, and at the writing job you'd be up $40k. You go to college for a potentially very employable position. The opportunity cost of college was given up when investing for your future self. Eventually, the benefits of going to college will outweigh the opportunity cost of the writing job. You will be making more money with that investment of college than you otherwise would have.
I'll take my own personal situation with this one. Top two options post-high school: Go to college or do Praxis. Both cost money, Praxis substantially less. At the end of Praxis, I'll be down a fraction of what I would be down at college, hopefully, will know what life path I want to go down and have a high likelihood of getting a good job. At college I would be in debt, have less of a chance of knowing the path I want to go down, don't have any real-world experience, and I'm not guaranteed a job. Both options are ways of improving on my human capital, but Praxis made more sense for me.
What do you value more?
I've driven every person I know crazy with this one. Sunk cost is something that has already happened and you can't get time, money, or value back. An irretrievable cost that can't be recovered. Knowing this is essential in making good decisions and being able to walk away. A little example of this would be clothes you never wear. You bought them thinking you would wear them and cut all the tags off. You're not getting value out of them and you can't get your money back. Give them away. Somebody gave you a coloring book as a gift that you haven't touched in three years? Give it away. The "I'll get around to it" mentality is a plague. Donating or giving things away you don't get value out of not only declutters your life but can add value to someone else's.
A bigger example of this would be a relationship. (Economists are notorious for taking all the feelings out of heavy situations and looking at them too logically). You've been friends with someone for five years, you've spent all this time with them. Maybe you've grown apart, maybe they've become a different person. Either way, the marginal benefit doesn't outweigh the marginal cost, marginal meaning having a little more or a little less of something. You're not getting value out of that relationship. Investing more time isn't going to create value. And virtually every person thinks they have to keep doing it, or the time they spent on that person or thing was wasted. Both are wrong. You received value out of the relationship at the time, it wasn't time wasted. If you stayed past when you were happy and are just realizing it now, you still got value because you gained self-knowledge, and know what to do next time.
Keeping both these terms in the back of your head can be a great way to grow and understand yourself. I think it helps put terms and names to what we think, and why we think that way. It's not just cold hard facts, it's tangible and real. That's just my two cents.