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Thinking Economics

Mind Tricks?

People thinks I'm very rational when it comes to making decisions (especially personal ones), but it is really more about thinking economics than rationality. Economics was founded based on the assumption that all individuals are rational and acting on self-interest. Too often, however, we know little about what is really in our interest and worse of all, we have no idea how to put it into the equation. It'll then help to look at the market and what it is doing to decide.

It appears ironic that individuals may peer at the market to learn how to be rational when they are part of the market itself. Nevertheless, the fact remains that while individuals are capable of making good direct comparisons, complex patterns of choice emerge only through the market, which aggregates decision-making of an independent crowd (an important concept I briefly touched previously). The concept of opportunity cost proves invaluable at decision-making - when you can't decide what you want, think about what you are willing to forgo.

I was thinking about how capable kids around me often have parents who are not particularly educated and perhaps not with any outstanding careers. Of course there are exceptions but many smart capable people do have just plainly ordinary backgrounds much like mine. It dawned on me that the question is really how 'ordinary people' make such great parents. Parents who have a great career simply have to sacrifice much more in order to expend effort at raising their kids.

The high opportunity cost simply means that it might actually make sense for them to 'outsource' the work to someone who has less stake in their kids. In many sense, the same principles applies to a kid - for one who expects to be able to live life comfortably and have little expectations of themselves, slacking away poses a lower opportunity cost than one who knows that the alternative to working towards success is deprivation. Of course, I'm assuming that the kid has the level of maturity to consider this and understand the concept of opportunity cost, intellectually if not intuitively.

Eventually, what remains required besides economics thinking would be discipline; and discipline could also be explained by an intuitive grasp of economics and incentives. With the right way of positioning ideas in one's mind, one would be able to accentuate long term incentives while downplaying the benefits of instant gratification. That's what everyone in the west has to learn today.