Reason like a Self-taught Economist
Growing Meta #13
Salam all,
In the last 4 years, I said no to a lot of opportunities. Occasionally, I still think about them. Opportunities are exactly like Kinder Surprise, you wanted to know what was inside it — perhaps it’s a toy that you already have, one that you really want or one that you don’t want.
You can argue that hard-work > luck, but we still cannot control the variables.
So what do you do when you have several options and you have to pick one?
“What is the most useful idea in economics?” was a question asked in a conference full of economists in a famous podcast episode by NPR, 13,000 Economists, 1 Question. It had a lot of interesting answers (like applying revealed comparative advantage (RCA) to household management, e.g. my husband is better than me in both cleaning the dishes and cooking, but his cooking skills are better than his cleaning skills. RCA would say my husband should do the cooking and I the cleaning, even though he’s better than me at both - true story).
One answer that resonated was the importance of Opportunity Cost in our everyday decisions. What do we lose by pursuing option A over option B?
Opportunity Cost = What we lose from not pursuing Option B / What we gain by pursuing Option A
In product management, that would be: which feature should I prioritize next? We usually rank features against effort, time, impact, and other aspects. What if we rank features against each other?
In parenting, what is the opportunity cost of homeschooling against normal schooling?
In everyday life, what is the opportunity cost of reading a book against hearing its narration?
In education, what is the opportunity cost of pursuing an economics degree, vs. reading up on economic reasoning?
Do Economists Recognize an Opportunity Cost When They See One? A Dismal Performance from the Dismal Science [1]
This 2005 paper criticizes how economics is taught.
… as others have noted over the past 25 years, modern graduate education may emphasize mathematics and technique to the detriment of economic reasoning.
Many prominent economists write about the importance of some economic concepts over others.
“[a] good way to introduce economics is to review three of its most fundamental concepts: opportunity cost, marginalism, and efficient markets. If your study of economics is successful, you will use these concepts every day in making decisions.” — Case and Fair (2001) [2]
So they set out to test out PhD students’ understanding of ‘the most important concept in economic reasoning’: opportunity cost. They found that PhD studies do not make students good at that type of reasoning.
When you expose students to a lot of (unimportant concepts) they cannot use the most rudimentary concepts effectively.
“[T]he watered down encyclopedia which constitutes the present course in beginning college economics does not teach the student how to think on economic questions. The brief exposure to each of a vast array of techniques and problems leaves with the student no basic economic logic with which to analyze the economic questions he will face as a citizen.” - George Stigler (1963) [3]
I read up on opportunity costs this week because I am trying to quantify an opportunity cost to convince readers in the importance of doing one thing against the other. But it was futile effort, I couldn’t substantiate what would happen if Option B was chosen — it’s not a simple formula.
[1] Ferraro, Paul J., and Laura O. Taylor. "Do economists recognize an opportunity cost when they see one? A dismal performance from the dismal science." The BE Journal of Economic Analysis & Policy 4.1 (2005): 1-12.
[2] Case, Karl E., and Ray C. Fair. Principles of microeconomics. Pearson Education, 2007.
[3] Stigler, George J. Elementary Economic Education. American Economic Review, Papers and Proceedings. 1963. 53(2): 653-659.