To choose and to be chosen

I chose economics as my major for undergrad and continue to pursuit a career in the subject. So what in it for me, and hopefully you, to pay more attention to the subject.


Definition of economics may vary yet we can agree with Lionel Robbins on his words:

"Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses."

Economics is the science of choice. To understand economics, one enters a quasi-scientific approach to make decisions.


What makes this approaches solid due to the fact that it assumes economic agents (aka human) to be rational and self-interest with unlimited needs and limited resources. And look at the world right now, we barely see anyone who does not fall into the category. Throughout my time, economics teaches me the following:


1. To think at margin


At the very first lecture, students was introduced the concepts of marginal costs and marginal benefits. One would choose A over B if the Net benefit of A > Net benefit of B. Economists explain why people stay home watching TV using the marginal method. The cost of watching TV is your effort of "pressing button". The cost of going out, on the other hand, is "dressing up, buying ticket, and going out of the house". Watching movie requires less work and reduces stress level instantly. The net benefit of watching TV, therefore, higher than that of going out given the short period of time. In long run, watching TV will cost lots more: heath, social connections, career, v.v


What you gonna choose? Short term satisfaction or long term happiness? Economic thinking model helps me lots in life from choosing what to invest, to buy, and who to date (LOL). It became a language in thinking system.


Exercise: To date and not to date a hot guy/girl at college? Or why we should be cheap?


2. To never forget opportunity costs


Charles Murger once said:

"Opportunity cost is a superpower, to be used by all people who have any hope of getting the right answer"

So what is opportunity cost?

Homer quit 8 days of works to be second in the queue. Is it true that he lost nothing? In economics discourses, every action casts opportunity costs.

Opportunity costs represent the benefits an individual, investor or business misses out on when choosing one alternative over another. (Investopedia)

So for Homer, his opportunity cost his 8 day salary. Whenever you make decisions, you win some and lose some. Remember to include opportunity cost in the equation.


Exercise: What do you think is the Opportunity cost of Barney if he chose woman over suits? Was Barney sensible in economics terms?



3. To signal your peachiness


One of my favorite moments is the day I know "market for lemons" introduced by George Arthur Akerlof

Suppose buyers cannot distinguish between a high-quality car (a "peach") and a "lemon". Then they are only willing to pay a fixed price for a car that averages the value of a "peach" and "lemon" together. But sellers know whether they hold a peach or a lemon. Given the fixed price at which buyers will buy, sellers will sell only when they hold "lemons" and they will leave the market when they hold "peaches" . Eventually, as enough sellers of "peaches" leave the market, the average willingness-to-pay of buyers will decrease (since the average quality of cars on the market decreased), leading to even more sellers of high-quality cars to leave the market through a positive feedback loop. Thus the uninformed buyer's price creates an adverse selection problem that drives the high-quality cars from the market. Adverse selection is a market mechanism that can lead to a market collapse. (Wikipedia)

To fix the problem, Michael Spence suggested economic agent should utilize market signaling. In the lemon market, signal can be contract to guarantee the quality of the car. In job market, your education can act as a signal to prove your capability. Your acts, your clothes, your certificates can be signals to prove your worthiness in the world of "lemons". Since people know about signaling for such a long time, we have a saying "fake it until you make it". In the world of imperfect information, even the signal can be fake. But one thing for sure, if you don't signal, how you are gonna be chosen?


Exercise: You are on Tinder, how would you signal?



Reference:


Charlie Munger: Academic Economics — Strengths and Weaknesses, after Considering Interdisciplinary Needs, Farnam Street, https://fs.blog/2015/03/charlie-munger-academic-economics/

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