- Comparative Advantage — in contrast with absolute advantage, comparative advantage deals with opportunity costs. If A is better than B in doing Activity 1 (by 50%) and Activity 2 (by 10%) both, he has an absolute advantage over B in both activities. However, because if he spends time doing Activity 2, he would be losing more of the Activity 1’s fruit, he is at a comparative disadvantage while performing Activity 2 compared to B. If I am better than my cook in both Software Development as well as cooking, it is still better that my cook keeps cooking the food since, I can spend that time doing Software Development which is a much more valuable activity. As and when my salary increases, the value of my cook to me also increases.
- Law of Diminishing Returns — as you keep employing more and more labour on a piece of land, the output per labour keeps decreasing. This law holds true for many outputs which are dependent on a fixed volume of input.
- Marginal Utility — utility of an item at it’s margins, not the inherent utility. For example, water is inherently very useful, but removing one bucket of water from earth doesn’t make any difference. But removing one piece of diamond does since it’s scarce. I guess employee importance in a company would also be a function of marginal utility.
- Pareto Efficiency — if it’s possible to make someone better off without harming anyone else, it should be done.
- Loss Aversion — losing a dollar hurts more than gaining a dollar. People are risk averse when gain is involved but risk seeking when loss is involved. So it is better to present your pitch in a way that emphasises loss aversion (FOMO?). Probably also called as Deprival Super-reaction Syndrome by Munger. Also linked to endowment effect, where people attach higher value to things they possess.
- Externality — externalities are costs that are borne by a 3rd party and are not included in the price of a product, since the impact is not directly visible. For example pollution.
- Incredible Promises — people can anticipate what the government’s true motives are. Government can promise low inflation, but people know that in times of crisis, government would prefer lower unemployment over lower inflation. So they will adjust their behaviour accordingly. So it is better for the government to set up simple clear rules instead of making promises. For eg., too big to fail also falls back on this policy. This idea can be used in case of managing a company if you are a lenient boss. People know you will not be punished even if a mistake is caught. So it is better for the boss to set up clear rules up front which will be followed.
- Social Capital — capital is generally associated with machinery, human resources etc. But in a society an intangible form of capital exists. This is the way people interact with each other in the society. For eg., in the Indian society, due to close family relations, parents bear the costs of education for children. So they don’t have to take up loans resulting in very different dynamics. This idea can be used in evaluating sports teams. Apart from the skills of individual players, how they interact with each other also determines the competency of the team (probably what they refer to as chemistry). Or for evaluating a startup team dynamics.
- Signalling & Screening—in a social transaction when ‘A’ knows more than ‘B’, he will try to signal that information. For eg, for a job interview a candidate will try to signal his willingness to work, his competency etc through an education degree. Whether his degree is relevant to the work is less important than the signalling — that he has spent quite some money and time in education, is hard working through GPA etc. So online degrees won’t be as effective as the signalling is missing. Given that signalling is that important, one should think more about it in every professional setting. Be it seeking a job, fundraising etc. How can we signal to an investor that we are good a good company? How can we signal that we are dependable to an employer etc? Screening on the other hand is when ‘B’ tries to elicit information from ‘A’, like in a job interview by asking questions. So Elon Musk’s strategy of asking questions about the problems that a person has solved leads to effective screening. He weeds out people who are only good at signalling.
- Self-fulfilling Prophecies—prices are determined by demand. If enough people believe that a currency is going to fail, the belief becomes self-fulfilling as the currency devalues, people start losing investments hence jobs reduce, irrespective of the absolute initial conditions. The reverse is also true. The idea can be applied especially in startup fundings when just by being confident you can attract funding which can lead to the success. As mentioned by a mentor, if you don’t go into the meeting believing it, it will definitely be a no. Also as Munger says — “never underestimate a man who overestimates himself”
- Moral Hazard — in a contract between 2 parties, if one party cannot observe the other party, there is incentive for the other party to cheat, leading to a ‘moral hazard’. For example outsourcing goods manufacturing to China, they have an incentive to give defective products. Or maybe per hour billable contracts too.
- Searching Costs — in markets where all goods are distinct from each other (used cars, job market, dating), people need to search for the right good. This search involves costs (time and money). Hence market efficiencies can’t be reached since the buyer can search for 3–4 goods, almost working like an oligopoly and bring inefficiencies. In case of job markets it is the job seeker who is more desperate hence gets the bad end of the deal probably. But in case of early stage startups, it is the startups who have a high marginal utility of an employee, hence they get the bad end.
- Gresham’s Law — bad money drives out good money when it has a survival advantage. People who spam on Tinder have a survival advantage. In selling used cars, because of likelihood of defective product, prices go down, hence defective cars have a survival advantage. Thus it is always worth paying the market price in buying a used car from a trusted source like a relative.
- Metric Blackhole — “not everything which can be counted counts. Not everything that counts can be counted.” It is difficult to ascribe quantitative values to lot of important things in life. It doesn’t mean they are unimportant. Also, people when looking at concepts which go into a metric blackhole, tend to do things which are easier in the short term.
- Difficult Causality — in complex tasks, it is difficult to assign cause of an effect to one particular agent. Like in a flywheel, it is difficult to say which push got it going.
- Stockdale Paradox— face the hard facts, but maintain faith that you will succeed in the end. This is important to persist and also be realistic.