As a naturally analytical person, I am constantly in pursuit of ways to “hack” my life with the collection of data and manipulation of my habits. Recently, I stumbled upon the idea of the Law of Diminishing Returns.
For those unfamiliar with this economic principal, here is a working definition:
The Law of Diminishing Returns is a concept in economics that if one factor of production (number of workers, for example) is increased while other factors (machines and workspace, for example) are held constant, the output per unit of the variable factor will eventually diminish. Although the marginal productivity of the workforce decreases as output increases, diminishing returns do not mean negative returns until (in this example) the number of workers exceeds the available machines or workspace.
In everyday experience, this law is expressed as “the gain is not worth the pain.”
But, there is a way to get around that pain and still experience the gain.
As I invest more time, energy, money, etc. into something, there eventually comes a point where I stop reaping the results I used to in proportion to my investment. How do I capitalize on this? Keep reading…
Low on the scale, the ROI is high. As you make your way up the scale, the ROI decreases and can eventually become negative.
At some point, what I am investing will either not be worth the return, or will return negatively.
How do I know when my ROI is no longer worth the investment?
Let’s take this into a real-world situation: Jon Doe’s Video Career
At the start of his videography career, Jon invests a chunk of money into quality gear [Here the comparison is between Money(x) and Quality(y)].
There comes a point when the proportion of his investment to his return will decrease. In other words, at a certain point, the amount of money he spends on new gear will only be able to bring his quality up a small amount compared to what his ROI was when he started.
When he reaches this point, he should begin to invest his money in other areas of his career, such as hiring actors instead of using his friends. Instead of investing in better camera gear — which will now only show a small difference in quality — he should invest in actors which will show a large boost in overall quality.
He will invest the same amount of money, but have a higher return on quality because he moved his money when he experienced diminished returns.
Here’s how you can use this economic principle to accelerate your personal growth:
1. Change the allocation of your investment.
In the case above, the idea was not to stop the investment of money, but to invest that money into different areas where it was not previously invested. When you notice that returns begin to diminish, reallocate your investment.
Jon changed what he was investing his money into, and still reaped a high return on quality.
2. Change the investment in order to continue to reap the same type of return.
Another thing that could be done in the above example is to change the investment. The desired return is quality, so no matter what is invested, the goal is to see an increase in quality.
Instead of investing money into getting better camera gear — which at this point would cost thousands instead of hundreds of dollars — Jon could start to invest time into things like storytelling, learning how to edit, etc. Now his return is still quality, and he is saving the money he would have spent on expensive cameras to reap a low proportion of return on quality.
Here are some of my personal investments and desired returns:
- Knowledge (Yes, an investment can also be a return. Think about investing money.)
- Ability to travel
- Healthy life
- Deeper relationship with God
I encourage you to apply this principle to your own daily life and habits.
Take a few moments to write down the things that you want to acquire, learn, and become in this season of your life.
Think about the things that you have at your disposal to invest.
Begin to invest.
When you hit a wall, when you begin to notice that your desired returns begin to diminish, switch up where you are using that investment.
Or, think of the return that you desire and try out a new investment to reap the same benefits that you once enjoyed.
Thanks for taking the time to read this. Seriously. It means a ton. Feel free to let me know what you think!