Today, to get rich, you must know how not to get poor. To do so, you must be able to manage your finances very well. One method to excellent financial management would be thinking like an economist because they consider all aspects of a decision carefully to weigh out the pros and cons. Let us now explore how to think like an economist and how to use it to your benefit.
In the area of finance, to think like an economist, you must consider as many aspects as possible, be they financial equations, seen and unseen results, primary and secondary effects, short run and long run consequences. This is important because taking all factors into consideration will give you certainty to move ahead as you already know what will happen next.
As a result, you will have solutions for the predictable outcomes you encounter and this will greatly reduce your decision time towards them. Here, your initial work before the big decision is very tedious but as time passes by, they get simpler and easier.
Here, people must be able to look at things in the big picture. To make it clearer, this would mean knowing how things relate to and affect the whole and learning how to optimize specific products to maximize the whole instead of thinking micro where you often leave out and remove relationships to the whole.
For example, you have money in a savings account and may not get a good return on investment and if you think in micro terms, it may be lower. However, having savings can raise any deductions on home and auto insurance, reducing the cost of insurance. Here, if you look at the big picture (macro), savings can actually be good because it can lower your costs for starting other investments.
In addition, answers on micro situations are always dependent on the macro plan and this is clearly seen in the above example about how only looking at returns on savings could have made you lost a benefit for investing somewhere else.
Thus, in any case of financial management, people ought to look at things in a macro perspective because it sometimes can unlock good opportunities for yourself. Here, one example would be a fact on how knowing an investment (ethanol) well can bring you wealth in other investments.
Today, as ethanol demand rises, corn demand will increase as China and US can also make ethanol from corn which is used as food for chicken, beef whose demand rise with higher GDP per capita. Thus, an increase in ethanol demand will increase sugar (used to make ethanol) and corn demand. Here, if an investor knew of this well, he could simply have invested huge amounts of capital into these 3 investments and sit to reap his harvests.