Think Like an Economist

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“We live in strange times” Paul Krugman

Occupy Wall Street
Great Recession
Housing Crash
Trump’s Tariff Wars

What do these five events have in common?

They are all economic events.

Economics surrounds us.

Economics affects our daily life.

But, which parts of economics are essential?

How do we separate the critical events from the noise?

We live in a time of “fake news” including fake economic news.

Turn on any of the cable news shows and watch two “experts.”

They never agree, and we do not know whom to believe.

This article is part of a series on economics.

I want to make economics easy for any person to understand.

Thinking like an economist is not hard.

People think only geniuses can be economists.

But basic economic principles are easy to grasp.

Thinking like an economist will help you better understand the news.

By understanding economics, we become better citizens.

Do You Think Like an Economist?

You purchased tickets to an outside music concert that cost $250.

It is pouring rain, and you live an hour away.

Do you go?

Most people would go to the concert because they spent $250 on the tickets and do not want to “waste” their money.

An economist will not go if they do not want to get wet or drive two hours in the rain.

You spent the money in the past and cannot get it back.

But you cannot get your time back either.

An economist thinks, “My life starts now. What occurred in the past is irrelevant.”

Sunk Costs

It does not matter how much you paid for the tickets.

You do not get your money back by attending the concert.

The tickets are a “sunk cost.”

You do not get “sunk costs” back (unless you can return the tickets).

You should only attend the concert if it has current value to you.

Psychologists Two Reasons

It is hard for most people to understand the ticket money is gone.

But their time is not, and they can do whatever they want with it.

Psychologists have two reasons why it is so hard.

First, faulty framing.

We take our time and tie it to the ticket price.

Remember when your parents said, “Waste Not, Want Not.”

If you do not want to go to the concert.

You have wasted your money.

If you go when you do not want to go.

You have wasted your time.

Cut your losses and lose the money.

Use your time to do something else you enjoy.

Second, cognitive dissonance.

Wasting the $250 to most people feels painful.

Only the Rich can waste $250 and not feel like they wasted the money.

Most people go to the concert even if they do not want to stand in the rain.

If they do not go, they feel dissonance.

People make up a reason to go such as “it is not raining that hard.”

People go to the concert, so they feel the money is not wasted.

Dissonance fixed.

Final Thoughts

How do we apply this article to our everyday lives?

First, understand the difference between sunk costs and future costs.

Second, do not do activities to justify sunk costs.

If you stand in the rain at the concert, you cannot read the new book you bought.

Third, do you want to do an activity or are you trying to prevent cognitive dissonance?

Economics helps us to act more rationally.

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