A Few Unqualified Economic Theories

I have this belief that economics is really just the study of human psychology with a couple equations thrown in to keep the math majors happy.

The first time I took an economics course was Spring semester of my freshmen year in college. It was Microeconomics, meaning that it covered economic principles relevant to individual people and businesses.

I personally found it quit interesting. There are a lot of topics concerning how people make decisions as consumers and how seemingly minute changes in a business model can make or break an individual company.

The first couple chapters of it all is sort of basic “I’ve heard all this before” type stuff, such as the relationship between supply and demand. But then it gets into how businesses decide what to charge for their products and how advertising becomes a game with the human mind.

Below are a few economic related stories/concepts I find particularly intriguing.

*Disclaimer: I am a 20-year-old college student who is unqualified to parallel park and is certainly unqualified to teach economics. Please proceed with caution.*

Incentive

I began this post with saying that economics is really just the study of human psychology with a couple equations thrown in to keep the math majors happy. I really do believe that and here’s why.

With the most basic reasoning, economics is all about money. And money is something that a lot of people like. It’s something that really motivates people to do things. And that’s the key – motivates.

Money, when you get down to it, is an incentive. An incentive is a reason why something should be done. And figuring out why somebody should do something is all about getting into that person’s head. It’s all about human psychology.

Sunken Costs

A “sunken cost” refers to a cost that cannot be regained – as in no force on this earth could get you that money back which you spent. The thing about sunken costs is that consumers oftentimes make choices motivated by those sunken costs, which is something they shouldn’t do.

For example, let’s say you buy a non-refundable concert ticket. And then your friend whom you were going to the concert with says that they can’t make it anymore which means that you would go to the concert by yourself.

Your friend not being with you isn’t the problem. The problem is that you actually hate the band playing and the only reason why you had bought a ticket in the first place is because you wanted to hang out with your friend who is no longer able to attend.

“But I’ve already paid for the ticket so I may as well just go”, you think to yourself.

And there’s the trap of sunken costs which many consumers fall for.

You’ve already paid for this non-refundable ticket and you will never see that $100 again. So your decision on whether to go or not shouldn’t be motivated by that sunken $100.

If the time the concert is going to take up is time better spent studying or sleeping, don’t spend that time at the concert. If you’ve thrown $100 down the drain, don’t throw more money down the drain to pay for the gas that it’ll take to get you to the concert.

That non-refundable concert ticket is a sunken cost and you shouldn’t let that motive more negative decisions.

Smile Train

This is a story I read about in the book Think Like A Freak. I wrote a previous post about that book relaying another cool story I had read in it. If interested check out that post as well, linked below.

The M&M Trick

Smile Train is a non-profit organization that performs surgeries around the world for children who have cleft lips and palates.

The founder of Smile Train deployed this idea of how to receive more donations for the organization (anybody who has ever had to solicit for fundraising understands how difficult recruiting donations can be).

The traditional way of recruiting donations is sending some type of notice to a person and asking that person to donate by sending back money.

The founder of Smile Train put a twist on this idea and instead gave the person receiving the solicitation three options:

  1. That this would be their only gift and not to send another solicitation letter.
  2. That they preferred to receive only two communications from Smile Train each year, and
  3. That they wanted to stay up to date on Smile Train’s regular communications.

You see the trick? It’s in the first option. He used the fact that most people get pestered by receiving solicitation letters and so offered those people a way to put a stop to them by making a one time donation.

(Side Note: I think in the book they mention that the minimum donation for option 1 was a bit larger than a regular donation, which is another trick they deployed. But don’t quote me on that one).

The other thing they talk about in the book is how only 1/3 of respondents ended up choosing option #1. The lesson being that by giving those three options, even as the one asking for money, he acknowledged that it is bothersome to be solicited. And because of that acknowledgement, Smile Train became a much friendlier, relatable organization in the public’s eye, resulting in more positive publicity for them.

Users Vs. Buyers

I learned this while in an engineering class. We had a professor come in to talk to us about marketing and he gave us some exercises to do. One exercise was determining who your target audience should be for a bag that kept your wallet safe.

The obvious answer was people travelling overseas. After some discussion that pool of people was narrowed down to students studying abroad because students are most likely to be careless about that kind of safety.

But that wasn’t the final answer. The final target audience wasn’t the students themselves, but the parents, particularly mothers.

Think back to when you were a student, or if you are a student think about your current behavior. Are you really that careful all the time about your things? Most students at that age think they’re invincible and nothing bad can happen to them. Besides, you’re too busy enjoying yourself to worry about the safety of your wallet. On top of that, you don’t want to spend your money on a safety product – you need money for shopping.

So if you don’t buy that bag to keep your wallet safe, who will? Statistically speaking, in most cases that person is likely to be a female caregiver/relative.

Anyway, the trick is that you weren’t marketing to students, you’re were really marketing to adult females, which in turn affects how the product should be marketed for maximum sales.

Lesson in one sentence: It’s not just about who’s going to use your product, but also who’s going to buy it.

Having Money Vs. Spending Money

This is similar to the previous concept.

Put simply, if a really rich couple comes in to buy your car but ends up not buying it, strictly speaking they’re worthless to you.

But if a couple who doesn’t have a lot of money comes in and decides to become broke in order to buy your car, they’re the ones you like.

Wealth may tell you who has the most money, but it won’t tell you who will give you a final sale.

What Makes A Good Company

I always thought this blurb was clever.

Good companies will solve your problems, while great companies will solve your problems which you didn’t even know you had.

_________________________________________________________________

Housekeeping Note: As I have said before, I highly recommend Think Like A Freak and if you would like a more spread-out overview of the book, below is a link from Forbes Magazine that gives a nice summary of some of the concepts/lessons taught.

6 Surprising Ways Thinking Like A Freak Can Help You Succeed

Image from www.mariashriver.com 

One thought on “A Few Unqualified Economic Theories

  1. Shrey Srivastava says:

    Thanks for this blog post on unqualified economic theories; I really enjoyed it and am definitely recommending this blog to my friends and family. I’m a 16 year old with a blog on finance and economics at shreysfinanceblog.com, and would really appreciate it if you could read and comment on some of my articles, and perhaps follow, reblog and share some of my posts on social media. Thanks again for this fantastic post.

    Like

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