Nothing More Than Econ 101

Morgan Housel once wrote that “being good at something doesn’t promise rewards.” He continues, “it doesn’t even promise a compliment”. Because what’s rewarded in the world is scarcity, he says, all that matters is what you can do that other people are bad at. 

It makes sense. In fact, it’s nothing more than Econ 101, where every high school student learns that price is determined by supply and demand. 

But when I read what Housel wrote, my first thought wasn’t to nod quickly in agreement. Indeed, I found this unexpected; a little harsh even. Yet it’s what you naturally get when you take the idea of limited resources and unlimited wants to its natural conclusion. 

One Simple Idea

This begs the question: how much of the world can be explained by just one simple idea? 

I think most of us would say that the answer is very little. There’s so much complexity in the world that what you need is a combination of ideas from multiple disciplines. It’s obvious when we debate something broad such as a government policy, but it’s also true in a narrower field such as physics. Not even something as ambitious as the Big Bang Theory is up to this task: it may be able to explain how the universe began and how it will end but it can’t explain why an apple fell on Newton’s head. You’d need another set of ideas for that. 

But ask how much impact one idea can make and you get the opposite answer. This tweak makes all the difference. Because you’re now no longer assessing an idea based on its explanatory value, the idea doesn’t have to hold up to scrutiny all the time. Instead, an idea can derive its value from the extent to which it rewards those who uphold it. In other words, it’s no longer just about when you’re right, but also how right you are. 

Take Warren Buffett. 

His investing philosophy can be summed up as “margin of safety”. This sounds like an oversimplification of how investing works, but that’s precisely what he’s doing when he looks for undervalued companies. Unlike VCs who swing for the fences, Buffett’s entire approach is centred around making sure that he still generates a good return even if he’s wrong about the future. 

Or how Steve Jobs approached design. His conception of design as how things work and not just how they look led to a revolution in how tech products are built, which then spilled over and influenced how design is approached everywhere. Sum it up in three words and you get a guiding principle that can be described as “function over form”, which again seems to be an oversimplification of what’s really going on. Yet, that’s the essence behind the design revolution that we’ve witnessed in the past decade. 

What’s surprising about all these is that ideas are not only simple, but general as well. They’re broad enough that you’d dismiss them as empty platitudes whose only place is in fortune cookies, and not something that you’d build your life’s work around. But as Paul Graham says, the most valuable insights are those which are general and surprising. You make these simple ideas valuable by not only invoking them in the broad general sense, but by applying them seriously in a narrow context and not just as an afterthought. The kind of serious where you bet on your entire career on it. 

Usefulness, Not Accuracy

One objection is that focusing on one idea leads to tunnel vision. After all, doesn’t the saying go that a man who is good with a hammer sees everything as a nail? You couldn’t possibly get a complete understanding of the world if you just focused on one thing. 

Yet, this misses the point. It assumes that we’re concerned with accuracy, but it’s really usefulness that we’re interested in. Additional inputs that don’t help us to make better decisions only add to the noise and draw our attention away from things that matter, which is why it makes sense to filter out details that are of little relevance. Indeed, our brain already does this by ignoring our nose even when it’s in our field of vision. Otherwise we’d be dealing with an additional visual element every minute we’re awake that serves no purpose. 

Focusing on one simple idea also has the additional benefit that it provides a North Star we can follow. Imagine that you’re Warren Buffett and you have to decide whether to invest in a company like Uber which has consistently been unprofitable. All you have to do is ask whether you have room for things to go wrong and still turn a profit from your investment. It’s shockingly simple. It’s true that you’d have missed out on the biggest tech investments in the past decade, but you’d still have an 80 year investing track record that everybody is envious of. Pareto’s Principle comes to mind here: because 80% of your results comes from 20% of what you do, you can afford to get 80% of the things you do wrong, so long as you really nail down the 20%. And let us not forget this principle itself is one of those simple ideas. 

Finding Your One Simple Idea

Of course, the real difficulty lies in finding an idea you can use. Not only must this idea have real substance, but it also has to be something that you’d be willing to take seriously. “Move fast and break things” might be a good motto to steal if you work at a tech company, but it’s unlikely to work for you if you’ve spent your entire career as a civil servant. 

How then do you figure out what one idea works for you? The world of startups offer a clue here. When VCs invest in a startup, they often ask whether there is founder-market fit. The question is essentially whether the founder is the right person to tackle the problem their startup aims to solve, and to do that, they look at the founder’s interests and experience. The fit is typically found when a founder has faced the problem repeatedly or has the right skills to solve it. 

I think the same approach works here as well. Call it Idea-Individual fit. 

If you look back at your past experiences, there’re probably ideas that you’ve used to guide your decision making, whether consciously or unconsciously. For example, a highly extroverted student who got through high school or college by making friends and asking for help might think that “it’s not what you know, but who you know”. If so, it’s not hard to imagine that this person could do well in the professional world by building a highly diverse network. 

Or perhaps you hold certain strong beliefs. Oftentimes, this is a belief that isn’t held in isolation, but one that is connected with other beliefs as well. By pooling them together and then comparing them, you can extract ideas that you’ve internalised so well that you don’t even notice the common thread that runs between them. Indeed, what you find may surprise you. 

The trick is to not dismiss whatever idea you find because it’s not grand or complicated enough. In fact, chances are that it will be underwhelming. But that’s fine because all progress starts from a simple idea, and following something that seems obvious may lead to unexpected outcomes. 

That’s the nature of most things: nothing more than Econ 101.