Do you want to think like an economist?
Are you planning to go to a cocktail party full of economists? Here’s a primer on how they see the world.
1. We’re all nuts.
People don’t always make rational judgments and our decision-making is flawed in a myriad of ways. A more interesting question is whether we are predictably irrational? That is less clear.
2. Umbrellas don’t cause rainstorms.
We confuse correlation and causation. Just because two things are associated with each other does not mean that one causes the other. Or as Paul Krugman has suggested, soup kitchens didn’t cause the Great Depression.
3. Are you feeling lucky?
We are fooled by randomness and conflate skill and luck. I know from personal experience playing poker and bridge — when I win, I’m sure my success was due to my superior skill but when I lose, I’m equally certain it was my bad luck. I’m not the only card player to feel that way.
4. We like bargains.
Economists say that demand curves are downward sloping. In English, we say people buy more stuff when things cost less.
5. We dislike commitments.
Option value is when people are willing to pay more to have the flexibility to cancel on demand. Said another way, we need a better deal to be locked into a long-term commitment whether it’s a health club membership, phone contract, or bank CD.
6. Life is full of trade-offs.
We need to make choices between government spending on walls versus bridges, consuming today versus saving for tomorrow, or opting for more or less risk in your investment portfolio.
7. Life is not fair.
Equity (that is, fairness) and efficiency conflict and the right balance is a political choice. Social welfare programs may incur waste and fraud, but when you tighten up controls, deserving recipients suffer. Corporate welfare never seem to be held to the same level of scrutiny.
8. Tom Brady shouldn’t mow his own lawn.
The law of comparative advantage suggests that each of us should focus on what we do best and trade with others when it makes sense. But, free trade does not make everyone better off. (See point #7.)
9. There are no more cod in the Gulf of Maine.
The tragedy of the commons occurs when we over-consume a common good such as a fishery or grazing land. Economists have a solution known as the Coase Theorem. It can work — there are still lobsters in the Gulf of Maine — but it’s difficult to implement as it is not fair to all parties. (See point #7.)
10. Don’t ask a barber if you need a haircut.
Principals (that’s you) and agents (that’s the other party with whom you transact) often have misaligned financial interests. Whether they are dentists, auto mechanics, or financial advisors, what is best for them may not be for you.
Now you can hold your own at the cocktail party.