Heather R Morgan
July 30, 2019
From time to time my grandma likes to ask me, “So Heather, how are you using your economics degree?”
While I quit the field of economics many years ago to be a software entrepreneur—a decision I never regret, I like to think I still use my economics knowledge, math, and decision making logic every day.
Whether it’s assessing business and investment opportunities, trying to optimize various areas of my business, or making tough leadership decisions, I still rely on many of the principles I learned as an economist.
You don’t have to get a Ph.D. in economics to learn these lessons.
Much of the most valuable and widely applicable economics principles I learned were during my undergraduate years at the University of California Davis.
Here are two indispensable economics concepts that can help anyone make better financial, business and life decisions—whether they’re a startup founder or just someone who wants to get the most from life and work.
Economics Lesson #1: Always think about “Opportunity Costs”
Most people think about cost when they’re considering buying something. However, they often forget to consider the “opportunity cost” of doing something. In simple terms, opportunity cost is the cost of other forgone activities.
For example, if I was to consider going to graduate school for a Ph.D. now, I should consider the opportunity cost of not working for five to eight years ( or more, depending on what I’m studying ). That would include the explicit cost of my foregone wages I could have made if I was working instead, as well as the implicit cost of the skills, connections, and work experience I could gain from a job ( or doing my own startup ).
Whenever making an important life or business decision, be sure to also weigh the opportunity costs of each alternative option. Be wary of decisions that could greatly limit your opportunities unless the value is likely to outweigh those forgone options.
Of course, if you are truly passionate about something, you can consider the intrinsic value of that option when making your decision, such as the satisfaction of following your lifelong dream. Maybe that choice is satisfying enough for you to forgo the opportunity cost of greater financial gains. And that’s totally okay.
But personally, when making important decisions I will always try to choose the path that will create the most opportunities and greatest agility, as things don’t always go according to plan.
Economics Lesson #2: Don’t chase after “Sunk Costs”
We all make bad decisions sometimes. Whether in business, with our finances, relationship choices, or other aspects of life, everyone is bound to screw up sometimes.
And that’s perfectly fine and normal.
The important thing is to not let ourselves be trapped by those mistakes because of an emotional attachment “ sunk costs .”
Sunk costs are things that we have already paid that cannot be recovered. They could be financial, or the time and energy we spent on something.
It can be terrifying to cut your losses and walk away from something you spent years working on. You’ll find yourself thinking about all the things you could have done with that time and money, and you don’t want to let it go because you feel like you’re throwing away everything you already put so much into.
But sometimes cutting your losses is your best option.
The process is hard and painful, but you have to remember things change.
As we learn and grow, what might have been a good decision at the time based on the information we had and the resources available might not be our best option later on.
No matter how much time or money you’ve spent, there’s nothing worse than continuing to throw good money after bad.
Just like you have to prune the rotting limb to keep the tree healthy and growing, you have to let go of sunk costs in order to make room for your own growth and better opportunities.