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Week 3: Marginal Thinking

How to think about the value of anything extra.

 

What is thinking on the margin?

Marginal thinking is thinking about how much extra resources are worth. If you have no bananas, and you get a banana, it’s worth a lot more to you than if you already had a million of them. Compare this to thinking about the average (and people often equivocate between the two). For example, a charity might be the most effective in the world on average, but if it’s just fundraised a lot, extra (marginal) donations might be going into their less effective programs.

Say you’re thinking about tending to your banana farm (how else do you get a million bananas?), you want to know whether you should work more to produce more bananas. You might have already invested a lot in making your farm more efficient, meaning that extra resources won’t do as much to improve productivity. This is because, in this case, there are diminishing marginal returns to investment (though you can also have increasing returns, like through economies of scale, advantages of being large in scale).

Examples of marginal thinking

Slightly less trivially than the worth of bananas, a lot of people donate to charity. But where would donations do the most good?

This, of course, depends on many factors, but one is what my donation will achieve, not what the average donation to that charity achieves. For this reason, charity evaluator GiveWell, determines the room for more funding of its recommended charities.

Another application of marginal thinking is the profitability of software companies — their profits at the margin are often very high. They have a lot of fixed costs (to develop the software in the first place they need to pay a lot of engineers, rent buildings etc.), but it costs the company little to download or use a program from the internet. Because marginal investments don’t yield as much benefits to you as the first few, we should do the the projects with the highest initial returns first, what’s called ‘pick the low-hanging fruit’.

Also check out

  1. Margins and Thinking at the Margin, Library of Economics and Liberty.
  2. Thinking at the margin, EA Concepts

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