The article Most people think that economics is all about money, but in fact, it’s far broader than that. Economics is really all about making choices and decisions. These might indeed be related to money. For example, is it more economical to go to a cheaper supermarket if a taxi there and back needs to be included in the cost? However, economic principles, especially those of behavioural economics, can be usefully applied to all areas of our lives. Paragraph A Possibly, the first thing we can take from economics is the importance of doing a cost-benefit analysis when making big decisions. Comfortable though we may be with making a list of pros and cons, we should recognise that it is actually a rather ineffective tool. Just one of the cons might easily outweigh all of the pros. A cost-benefit analysis is something altogether more sophisticated, which allows you to be more objective. For example, let’s say that you have to decide whether to make a journey by train or aeroplane. The financial cost of each journey is obvious, but there are also other costs to take into account, such as the cost in your time, the cost in terms of how tired you’ll be on arrival, the environmental cost and so on. Give each of these a score out of five, and then weigh them up against the potential benefits, scored in the same way, and the choice becomes much easier. Paragraph B There are also certain in-built human biases we ought to bear in mind, for example, something known as ‘present bias’. Behavioural economics teaches us that people have a tendency to overvalue immediate rewards over long-term payoffs. A famous study showed that given the choice between receiving less money now, or more money later, most people would choose the former, even though they’d end up less well-off. This is also the reason why people procrastinate, or why you should never go food shopping when you’re hungry. Once aware of this propensity however, you can make sure you avoid it. For example, if you put your money in a savings account where you can’t get at it easily, you’ll overcome the tendency to want to spend it straightaway, rather than wait. Paragraph C Another trap many people fall into is the sunk-cost fallacy. A fallacy is an idea that is often believed to be true, but which is, in fact, false. The sunk-cost fallacy is the idea that because you have already invested time or money in something, you should persist with it no matter what. One study which demonstrated this tendency asked people to imagine they were at a birthday celebration and that they were offered chocolate cake. The researchers told some people this was from a local supermarket, and others that it was an expensive handmade cake from a shop almost an hour away. Having been told the cake had required a significant investment of time and money seemed to make people much more likely to eat it all, even though they felt uncomfortably full, or weren’t that keen on chocolate cake. The sunk-cost fallacy often leads us to do things which are really against our best interests. For example, maintaining a friendship with someone we don’t really like anymore, because we have known them a long time, and feel that nothing can be done about it. Or persisting with a business idea, even when it’s clear that it isn’t working and is actually losing us money. Our decision-making ability can be dramatically improved by recognising when we may be falling prey to this fallacy. Paragraph D Even when we’ve made a good decision, we should also be aware of the law of diminishing returns. This economic concept states that after a certain point, investing more money (or effort) does not lead to increased benefits, and, notwithstanding the objective risk, may even have an adverse impact. For example, if you get your friends round to help you decorate your room. To begin with, having more people to help seems constructive, but if you invite too many friends round, you’ll end up with a problem: imagine 20 or 30 people all trying to paint the same room at the same time! This law can also be applied to eating pizza; the first few slices are great, but after that, it becomes less and less palatable, and if you kept going, you might even feel nauseous. This principle might seem obvious, but it is really a reminder that doing your best is good enough. If you keep pushing and trying to do even more, you’ll end up subject to the law of diminishing returns. Paragraph E Finally, be aware that, according to economists, there’s no such thing as a free lunch. Apparently, this expression comes from a time when it was common to give away lunch when you bought a drink. The lunch would be made as salty as possible, so you’d end up spending far more than anticipated on (expensive) beverages. Nowadays, it’s worth considering this concept when it comes to free social media sites: watch for the snare – if you aren’t paying for a product, you ARE the product.
