A PhD student in Sweden asked a bunch of Swedish economists which concepts they thought ordinary people should understand in order to manage their own affairs better. Here are the results:
The only concept that got anything like a positive response was opportunity cost. Understanding of interest and marginal concepts got a sort of meh response, and all the others were so low that basically no one thought they were very useful in regular life.
I'm not so sure myself that an understanding of opportunity costs would be very useful. It's one of those things that I suspect most people understand innately. Ditto for interest. Everyone knows that interest means you pay more than the base price for an item in return for the privilege of paying over time. And most common forms of interest—mortgages, credit cards, auto loans—come with pretty understandable descriptions of the gory details. As for marginal concepts, I dunno.
On the flip side, I would have put risk and sunk costs higher. I think there are plenty of people who could benefit from having it hammered into them that higher return always comes with higher risk—which means you really could lose a lot of money.¹ Likewise, people could benefit from taking sunk costs more seriously, although I'm a little curious about what effect that would have in practice.
What else? Apparently not a single Swedish economist mentioned any of the concepts of behavioral economics, which surprises me. I won't try to construct a list, but surely there at least several findings of behavioral economics that many people could benefit from knowing.
¹Although it's true that the people who could benefit from this advice are the least likely to pay attention to it. That's very frequently the case, though, and it shouldn't stop us from trying.
Sweden opperates on "experts will set policy and we will obey" if you recall, so a knowledge of behavorial economics is both unnecessary and counter productive.
I'm surprised that Depreciation is not mentioned. That tripped me up for decades. Although I had a reasonable salary, I was (mysteriously to me) chronically short of money. I finally figured out that purchasing (say) a car came with what I called "implicit spending": the money that would be (eventually) required to replace tires, battery, brakes; to do maintenance; to replace the car eventually. Although I had (implicitly) committed myself to paying those expenses, I failed to set aside enough money each month to have it ready when the expense came due — thus another "surprise" expense.
Once I realized what was happening, I redid my budget to recognize all this "implicit expense." For example, if a set of tires cost $800 and I could expect them to last 60 months, I put into savings $800/60 ($13.33) each month so I would be ready when the time came. And so for all the other implicit expenses I could identify (and for a homeowner, it's a long list: appliances, roof, carpets, repainting, and so on. Some of those don't occur often — A regular 3-tab asphallt shingle roof will last 15-18 years — say, 198 months — but it can cost a lot (a search will turn up calculators that will give an estimat).
This article on Medium explains the approach in some detail. Once I figured out depreciation/implicit spending and accounted for it, my finances have improved remarkably, and I continue to refine my approach.
Good one!
That is an excellent point. Michelle Singletary keeps harping on a "life happens" fund where you set aside funds for ad hoc expenses like this but is relatable to many ordinary folk having grown up poor in Baltimore, MD but rescued by kind-hearted mentors in her teen years and got her into college and journalism school.
It's not enough to be lectured on what you should be doing, it's really helpful if the person relaying the advice is relatable.
It’s a great question! They should do the same but ask about impacts to society. Externalities should be at around 100% but I’d bet, coming from Economists, that it’d be closer to 5%.
Behavioral economics operates from "How do ordinary people actually think and act" and serves as an explicit critique of Homo Economius used by neo-classical economic theory. Many of the terms used in the field relate to common sense and rules of thumb (heuristics) everyone uses already. So, the idea of "default choice", "noise", "error types", etc. are ones that people would go "Of course I know what this is!" but other economists would object, "It messes up the mathematical model I am using!".
The only term I thought of while typing this comment was "Heuristic" but that's just "Rule of Thumb", or an crude estimation/approximation done quickly. People know that, use that, rely upon that. The economists being critiqued by behavioral economics pretend people don't. That's it.
Sunk cost was also the one I thought of first that I think most people do not appreciate. Also known as "throwing good money after bad".
Well....to understand "opportunity cost" you need to understand compound interest, risk, etc. You also have to understand you can't do this with 20/20 hindsight, i.e. I should have bought Amazon stock 20 years ago or got into BitCoin during one of it's crashes then sell at one of its highs.
One thing which is almost always neglected by classical economists is the extent to which economic decisions are made on the basis of group instincts rather than rationally. Do people really weigh the risks and benefits according to the listed concepts when deciding whether to invest in bitcoin or not? I am sure that the decision is made in many instances on the feeling that people will be "left behind" if they don't get in on the latest craze, whether it is economic or social. People see others making money on bitcoin and they have to get in too. They see others around them buying giant pickups or SUV's and they have to have one too, regardless of the economics. This is probably the same sort of thing that activates individual wildbeests (say) to join the stampede when one of their number in a herd spots a lion. Such instincts may be adaptive at some stage in the development of the species, but not constructive in an economic context. I am not sure how well this is covered even in "behavioral economics".
This is certainly something which most people do not understand or even consider. The survey (among a great deal of other evidence) indicates that economists don't either, or at least the don't consider group psychology to be an economic concept.
I don't know if this can really be properly labeled as an economic concept per se, but I think it would be very worthwhile to better calculate and publicize the personal value gained from public investment policies. Our prevailing concept of net pay, a number arrived at by only subtracting from gross income the cost of taxes, leaves out the value of the services and goods as benefits acquired from those taxes. Maybe I'm naive, but it might make it easier to rally public support for some policy initiatives.
My immediate first reaction to this is sort of meta: Often when experts in any field are asked what ordinary people should know about in this particular field, they themselves are very enthusiastic (it is their chosen field after all) and find it somewhat hard to understand that others may be less interested. They naturally consider their field crucial, and usually think most people should know a lot more about it than they do. For example, my field is math, and I definitely think people in general would benefit from knowing a lot more mathematics than most do. But these economists apparently don't think it is particularly important for people to know about these things? Strange, in my opinion.
Yes I agree and I didn't major in math. It's very helpful IMO to be able to do a bit of "numbers in your head" or not freak out at the notion of pasting your monthly expenses into a spreadsheet to see what they are.
I think marginal concepts is incredibly important when it comes to actual issues. I argued for hours and hours with a friend who insisted that, because criminals will just get guns anyway, gun restrictions would do nothing to alleviate gun deaths. I just could not get him to understand that making it marginally harder to get a gun will marginally reduce deaths from guns.
That applies to basically every single one of our political issues. Everything is marginal. Nobody seems to understand marginal behavior at a macro level.
Strongly disagree about interest, during the student loan debates you would have people go into fits because they were paying off their loans for 10 years at the bare minimum and they "still didn't reduce the principal!" acting like they were some victim of a con-man, but when pressed for details, and math was done, they were paying everything the bank said they would pay for the duration and interest rate.