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Economics terms that help me understand the world

Since my undergrad years, I’ve taken an interest in the pop science of behavioral economics. From books and articles and podcasts aplenty, I’ve found the shallow edges of the social science quite helpful for my worldview. (I also book a second-hand microeconomics textbook and dug in.)

The clearest result of that has been an entire set of familiar terms that help explain the world. These phrases have been valuable to me. I’d like to share them with you.

Of course these aren’t all the phrases in this world but they are the ones I see most commonly. There are lots of big lists of economics terms, including comprehensive ones that have transcended into universal vocabulary (we know the free rider problem and yeah, supply and demand has a relationship informed by Adam Smith’s invisible hand). This isn’t that, just ones I use in my life most often.

A foundational understanding from N. Gregory Mankiw, the author of that textbook I leafed through is that “Economics is the study of how society manages its scarce resources.” That means our modern understanding is that governments should intervene in economies to stimulate growth and make it more equitable.

This dive has inspired much of my thinking: For example, the idea that inferior goods, like bus rides, go up when income goes down.

Below find both links to their formal definition and my more simplistic understanding of them. Again, this just a list of the phrases and concepts that moved me, so this is entirely a subjective list of terms, not comprehensive.

  • Agency Dilemma — A kind of moral hazard in which someone will take more risks because someone else bears the results with a failure.
  • Attribution Bias — We justify our own mistakes but assume the worst of others who make the same ones.
  • Comparative advantage — Even when the farmer is less productive than the rancher both benefit with specialization. There is greater comparative advantage because of a lower opportunity cost, so, for example, Tiger Woods shouldn’t mow his lawn even if he can do it in half the time as the person he hires to do the job.
  • Dunning-Kuger Effect — The more inexperienced (and worse) you are at something, the more susceptible you are at thinking you are better.
  • Illusory superiority — We assume we are better than we are at many things, because we give ourselves excuses but not others (attribution bias), particularly the worse we are (Dunning Kuger).
  • Information Asymmetry — When one party has more (or different) insight than another and can leverage that.
  • Lorenz Curve — It charts income inequality by showing how far from perfect distribution a community is.
  • Loss Aversion — We care more about a loss than an equivalent gain.
  • Nash equilibrium — In stable systems, all actors do what is best for them consistently, which can be good for individuals even when bad for groups. (This was the first concept in game theory I found in high school, from a stray printer)
  • Negative Externality — Sometimes others incur the costs from our transactions with others. Sometimes those are bad things.
  • Price-Quality Heuristic — We assume there’s a direct relationship between cost and value. This isn’t always true.
  • Promissory estoppel — an agreement that extends beyond the verbal into an enforceable agreement
  • Rational Ignorance — When the cost to gain information is more than the savings for having that information, we sensibly don’t pursue it.
  • Sunk Cost Fallacy — We often will choose to incur more losses because we’ve already invested in a decision.