145. Should I create my own economic models?

Much of the study of economics is making models. Models are just simplified versions of realities to make generlizations and predict what people are going to do or what they should do.

Supply and demand is the most fundamental model in economics. And we use it regularly in our thinking, especially as we are dealing with supply chain issues and inflation.

But we can use the concept of creating models in more aspects of our lives and incorporate that sort of thinking into everyday use.

A model can involve an agent making a decision about scarce resources. You can identify a problem that needs a solution, or maybe you need help explaining something you don’t quite understand, or maybe you have a dispute you want to resolve. You can do this with things that are happening in the world, or with business decisions, or with personal life decisions too.

And then you build a model that will help predict what people will do and why, or what they should do to optimize a certain output.

  • How to use scarce resources of time and energy to set better goals (taking into account things like the planning fallacy)
  • Dividing household labor and work that maximizes both enjoyment and efficiency
  • Trying to model out why my children behave the way the do, and how to incentivize them to behave better
  • How to make better decisions when ordering at a restaurant

(There are probably much better ideas out there than what I listed.)

Making a model out of things can be fun–but it can also help you take a step back and look at things more objectively and discover something you didn’t realize before. Sometimes we emotionally attach ourselves to an answer when it doesn’t really make sense or optimize what we really value. Models can help solve that.

And there aren’t any rules of how to do it–just try to create a graph or a table with the data and assumptions you have, and then see what the trends are.

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