What it Takes to Think Like an Economist
Thinking like an economist can seem like a skill limited to solving problems of the marketplace, but this type of thinking can be applied in many areas outside the field of economics. Thinking like an economist can help avoid irrational decision-making, can aid professionals in improving the decisions that affect their lives and can help you better understand the world around you. Once you learn to think like an economist, you will see how virtually all decisions—from something as small as where to go to dinner to whether to begin a new career or go back to school for a master’s degree—become clearer.
What does thinking like an economist mean?
At its most basic, thinking like an economist means evaluating the facts without allowing opinion or logical fallacies to enter into the calculation. Economic theory is fundamentally about the idea of scarcity, the idea that everyone—individuals, corporations and governments—only have limited resources and must decide how and where those resources will be allocated. Economists evaluate the “cost” of individual and social choices to determine the best choices for themselves or others in the face of this scarcity.
Assembling an intellectual toolkit similar to that of the economist can help you make smarter decisions in your professional and personal life. There are three basic concepts that form the foundation of economic thinking:
The Cost of Something is What You Give Up
Opportunity cost is a fundamental economic theory and one of the most important to understand if you want to think more like an economist. Opportunity cost teaches that nothing in life is free, even if it doesn't cost money. Understanding opportunity cost can help those who want to think like an economist to decide, for example, if going to graduate school is worth the cost. If getting a master's degree is something you are considering, think like an economist and weigh the costs and benefits of that decision. Some of the opportunity costs of obtaining a master’s degree may be less time to spend on hobbies or leaving the workforce for a couple years; compare these opportunity costs to the benefits of having a master’s degree to make a rational, economist-like decision. Incurred Costs Cannot Be Recovered
Sunk cost is one of the most pervasive fallacies that an economist’s mindset can help you overcome. Simply stated, a sunk cost is any cost that has already been incurred and therefore cannot be recovered regardless of future outcomes. Think of this example: You buy a ticket to a movie and settle in only to realize halfway through that the movie is terrible—what do you do? Most people will sit through to the end, thinking if they leave their money will have been “wasted.” But if you think like an economist, you know sunk costs are already gone. Furthermore, you now understand the opportunity cost of giving up more valuable time watching a movie you don’t enjoy. The sunk cost bias is often talked about by economists as, “throwing good money after bad,” but it’s important to remember that it isn’t just about money; any type of investment you make—money, time, effort—is subject to this type of thinking. People Respond to Incentives
In An Introduction to the Economics of Information: Incentives and Contracts, by Inés Macho-Stadler and David Peréz-Castrillo, there is a brief mention of the Ukrainian pole vaulter Sergei Bubka, who broke the world record in pole vaulting 35 times from 1986 to 1995. By any measure that is an incredible feat, but it becomes more rational (and more apropos to the subject of thinking like an economist) when you understand Bubka's incentives. The Soviet Union at the time was offering athletes $30,000 every time they broke a world record. Bubka thought like an economist and decided instead of breaking the world record once, by a larger margin, he would break it 35 times, earning himself more than $1 million. This incentive theory plays out in daily life all the time. Evaluating how you respond to incentives in the world you and thinking about how other people respond to incentives you offer is an essential part of thinking like an economist.
Learn How to Think Like an Economist
Learning to think like an economist can add a great deal of value in your life, and can make confusing or difficult decisions easier. One way to learn economic thinking is to enroll in a master's program that teaches you economic thinking and how to apply it in everyday life. American University’s top-ranked online Master’s in Economics teaches students how to apply economic theories and principles to solve real world problems.
To learn more about the online MA in Economics, call (855) 725-7614 or request more information.
Economics explained: why you should study it and your career prospects
What is economics?
Economics, at its very heart, is the study of people. It seeks to explain what drives human behaviour, decisions and reactions when faced with difficulties or successes. Economics is a discipline which combines politics, sociology, psychology and history.
When you study economics you gain a toolkit of skills, approaches and ways of thinking that you can apply to a wide range of problems. Economics is one of the central disciplines underpinning the study of business and management and public policy.
Economics - a useful tool
An economics degree gives you a high level of mathematical and statistical skills and the ability to apply economic principles and models to problems in business, finance and the public sector. More broadly, economic concepts can be applied to understand the logic of complicated data, to see how things relate to each other, and to see the broader context.
Some of the specific skills you develop include:
communication - presenting ideas in a well-defined framework and supported by evidence that uses complex data
- presenting ideas in a well-defined framework and supported by evidence that uses complex data numeracy - handling complex data and techniques of mathematical and statistical analysis
- handling complex data and techniques of mathematical and statistical analysis problem-solving
analytical skills.
There are careers that use specific knowledge of economics, for example banks, insurance, accountancy firms, businesses and in government. These jobs may involve identifying financial risks or making decisions about where a company or a government should invest its resources in the future, or even how to design a bidding platform for eBay. There are also roles for economists in think tanks and consultancies that advise governments and companies on public policy, such as how to deal with the Greek debt crisis.
More broadly, an economics degree helps prepare you for careers that require numerical, analytical and problem solving skills – for example in business planning, marketing, research and management. Economics helps you to think strategically and make decisions to optimise the outcome.
Especially in demand are people who have studied Economics and Finance as they are particularly well-prepared for jobs in banking and the financial sector, such as in accountancy firms.
The well-developed methodologies used in the economics profession have helped the subject expand into providing tools for other disciplines, such as politics, law, health, education, management, and many others. Some worry that by using the approaches of economics, the assumption is being made that people are rational in the way they behave. To counter this, economists are bringing in insights from behavioural science, psychology, and neuroscience.
The way forward
In terms of new employment areas, economists would be well prepared for roles in ‘Big Data’. This is a new field and is about analysing large volumes of data to identify patterns, and so help businesses or governments make better decisions. This could be, for example, in relation to customer behaviour, the spread of diseases, crime patterns, or trends in financial markets.
With the plan for an integrated ASEAN Economic Community among the 10 nations of South East Asia, there may be demand among central banks and governments for financial economists who can identify and manage risks and develop financial regulations to meet the needs of the new market.
You may need to follow your bachelor's with a master’s to get the relevant specialist skills if you want to work in a competitive area such as for governments, banks or consultancies, or if you want to specialise in an area such as health, employment, insurance, or regional economic development.
Graduates may also use postgraduate study as a route to gaining professional qualifications required to work in certain career areas, such as accountancy or other financial professions.
Advice to prospective students
There is no doubt that to be a great economist, one has to be able to master the methods used in the profession, and have good maths and statistical skills to do this.
You also need to be interested in the world around you from history, to politics, to international affairs and consumer behaviour in your country and worldwide, as these all impact on how individuals, companies and governments behave and make decisions.
More information
Yu-Hsiang Lei [on right] studied for a bachelor's in Business Administration at the National Taiwan University. He studied for a master’s in econometrics and mathematical economics at the London School of Economics and Political Science in London, where he now is studying for a PhD degree.
7 Reasons Why You Should Study Economics
An economics course can teach you the fundamentals needed to decipher graphs and other important financial data, as well as the tools to develop a successful business strategy.
But how can you know if studying economics is right for you? Consider the possible outcomes of various economics programs and how they compare to your personal and professional goals.
What Is Economics?
At its core, economics is the study of how individuals, groups, and nations manage and use resources.
Economics can be broken down into microeconomics, which examines individual decisions, and macroeconomics, which is concerned with the economy as a whole. Both types of economics utilize historical trends and current conditions to inform business decision-making and make predictions of how markets will behave in the future.
Why Is Studying Economics Important?
Students who choose to study economics not only gain the skills needed to understand complex markets but come away with strong analytical and problem-solving skills, as well as the business acumen necessary to succeed in the professional world.
In fact, economics can be useful for professionals in all industries and aspects of daily life, not just in business.
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7 Reasons to Study Economics
Here’s a look at seven advantages of studying economics and how it can benefit both your organization and career.
1. You'll Expand Your Vocabulary
Whether it’s scarcity (limited resources), opportunity cost (what must be given up to obtain something else), or equilibrium (the price at which demand equals supply), an economics course will give you fluency in fundamental terms needed to understand how markets work. Even if you don’t use these words often in your current role, studying these economic terms will give you a better understanding of market dynamics as a whole and how they apply to your organization.
2. You’ll Put New Terms into Practice
Economics isn’t just learning a set of technical words, it’s actually using them to develop a viable business strategy. Once you understand the terms, it’s easier to use theories and frameworks, like Porter’s Five Forces and SWOT analyses, to assess situations and make a variety of economic decisions for your organization. For example, many companies need to decide whether to pursue a bundled or unbundled pricing model or strategize for the best ways to maximize revenue.
3. You’ll Understand Your Own Spending Habits
Economics will teach you about how your organization and its market behaves, but also offer insights into your own spending habits and values. For example, Willingness to Pay (WTP) is the maximum amount someone is willing to pay for a good or service. There’s frequently a gap between hypothetical and actual WTP, and learning about it can help you decode your own behavior and enable you to make wiser financial decisions.
For Shamari Benton, the concepts he learned in Economics for Managers opened his eyes to how everyday decisions are infused with economic calculations and principles.
“A simple grocery store visit becomes filled with economic references and analytical ponders,” Benton says.
4. You’ll Master the Nuances of the Field
Many people think of economics as just curves, models, and relationships, but in reality, economics is much more nuanced. Much of economic theory is based on assumptions of how people behave rationally, but it’s important to know what to do when those assumptions fail. Learning about cognitive biases that affect our economic decision-making processes arms you with the tools to predict human behavior in the real world, whether people act rationally or irrationally.
5. You’ll Learn How to Leverage Economic Tools
Learning economic theory is one thing, but developing the tools to make business decisions is another. Economics will teach you the basics and also give you concrete tools for analysis. For example, conjoint analysis is a statistical approach to measuring consumer demand for specific product features. This tool will allow you to get at the surprisingly complicated feature versus price tradeoffs that consumers make every day.
For example, imagine you work for Apple Inc. and you want to know what part of the iPhone should improve: Battery life, screen size, or camera. A conjoint analysis will let you know which improvements customers care about and which are worth the company’s time and money.
6. You’ll Be Better-Prepared for Graduate School
In addition to helping you make better decisions in both your personal and professional life, learning economics is also beneficial if you’re considering a graduate business degree. Studying economics can equip you with the problem-solving skills and technical knowledge needed to prepare for an MBA.
An MBA typically includes courses in finance, accounting, management, marketing, and economics, so if you decide an MBA is right for you, you’ll already be one step ahead. Furthermore, a foundational knowledge of economics enables you to use economic theories and frameworks to decide if graduate school is worth the financial investment.
7. You’ll Improve Your Career Prospects
An education in economics can improve your employability in a variety of industries. According to the World Economic Forum's Future of Jobs Report, analytical thinking and complex problem-solving skills top the list of transferable skills that employers will find increasingly important by 2025, both of which can be gained by studying economics.
In addition, many careers require knowledge of economic concepts, models, and relationships. Some possible career paths for economics students include finance, banking, insurance, politics, and healthcare administration. You’ll also be able to further your career in your current industry, as an understanding of the economics that power your industry can help you to be more effective in your role.
Options for Studying Economics
There are many options available for those looking to pursue an education in economics. Depending on your personal and professional goals, your current stage in life, and other important factors, you may choose to pursue an undergraduate or graduate degree in economics or take an online economics course to expand your future career opportunities.
Whether you're new to the business world or an experienced manager, having a thorough understanding of how markets work, pricing strategy, and consumer behavior is essential to success.
Do you want to take your career to the next level? Explore our eight-week online course Economics for Managers or other business essentials courses to learn how to apply economic principles to business decisions.
This post was updated on June 8, 2022. It was originally published on November 30, 2017.