Random Concepts

Collection of economic principles, concepts and useful decision-making tools for everyday life.

Opportunity cost

That is the cost of choosing one opportunity over another when you have to choose exactly one. Opporunity cost = Net return option A - Net return option B.

Computing opportunity cost is about balancing between scarcity and choice. The objective of opportunity cost is to ensure efficient use of scarce resources, e.g. time.

Sunk cost

Wiki: Sunk cost (also known as retrospective cost) is a cost that has already been incurred and cannot be recovered.

The opposite of prospective costs, which are future costs that may be avoided if action is taken.

In other words, a sunk cost is a sum paid in the past that is no longer relevant to decisions about the future.

Idioms:

• water under the bridge
• crying over spilt milk

Only current alternatives matter. Example is in poker when you compute pot-odds. You care about the ratio of money you have to bet now to call/raise with respect to the pot size. You do not care about the amount of money you put in the pot (though pot size is related to that).

Closely related to DESIRE NOT TO APPEAR WASTEFUL.

Marginal principle (bygones principle)

If a new factory was originally projected to yield $100 million in value, and after $30 million is spent on it the value projection falls to $65 million, the company should abandon the project rather than spending an additional $70 million to complete it. Conversely, as a rational actor, if the value projection falls to $75 million the company should continue the project.

Obviously, sunk costs are bad and should be minimized.

Identifying sunk cost

Ask yourself: "Can you recover partially or the full amount of the cost you paid for?"

• Stock price drop is not a sunk cost (unless you close position)
• Poker call pot is a sunk cost
• Buying a car is not a sunk cost (not fully, can resell)
• Repairing a cor is a sunk cost (cannot unrepair and get money back)

Endownment effect

Survivorship bias

Cross the road like us, we are all fine...

Milton Friedman

Имa чeтиpи нaчинa, пo ĸoитo мoжeтe дa xapчитe пapитe cи. Moжeтe дa xapчитe coбcтвeнитe cи пapи зa ceбe cи. Koгaтo пpaвитe тoвa, виe нaиcтинa внимaвaтe ĸaĸвo пpaвитe и ce oпитвaтe дa пoлyчитe нaй-дoбpoтo зa пapитe cи. Cлeд тoвa мoжeтe дa пoxapчитe coбcтвeнитe cи пapи зa няĸoй дpyг. Haпpимep, ĸyпyвaм пoдapъĸ зa няĸoгo. B cлyчaя нe внимaвaм мнoгo зa cъдъpжaниeтo нa пoдapъĸa, нo мнoгo внимaвaм зa цeнaтa. Cлeд тoвa мoгa дa xapчa пapитe нa няĸoй дpyг зa ceбe cи. И aĸo xapчa пapитe нa дpyги xopa зa ceбe cи, тoгaвa oпpeдeлeнo щe вeчepям дoбpe! И нaĸpaя, мoгa дa xapчa пapитe нa няĸoй дpyг зa няĸoй дpyг. И aĸo xapчa пapитe нa няĸoй дpyг зa няĸoй дpyг, вcъщнocт нe мe интepecyвa цeнaтa или ĸaĸвo пoлyчaвaм зa тeзи пapи. Eтo ĸaĸ пpaвитeлcтвoтo xapчи пapи. A тoвa e oĸoлo 40% oт нaциoнaлния ни дoxoд.

Others

Бизнеса е обикновено някакво гонене на мечта. Нужно е общо подклаждане на тази мечта.

Социалната държава просперира, защото хората са по-привлечени от безгрижието, отколкото свободата - свободата идва с отговорност.