Externalities: Calculating the Hidden Costs of Products

Externalities let you account for the true cost of products by including hidden costs
What’s a mispriced externality? You mentioned it on a previous episode. An externality is where there’s an additional cost imposed by whatever product is being produced or consumed, that’s not accounted for in the price of the product. This can happen for many reasons. Sometimes you can fix it by putting the cost back into the price. More

Net Present Value: What Future Income Is Worth Today

See what future income is worth today by applying a discount to its future value
Let’s talk about net present value (NPV). Net present value is when you say, “That stream of payments I’m going to get in the future—what’s it worth today?” Here’s a common example: You’re joining a startup and getting stock options, and the founder says, “This company is going to be worth $1 billion, and I’m giving you 0.1% of the company; therefore, you’re getting $1 million worth of stock.” More

Consumer Surplus: Getting More Than You Paid For

People are willing to pay more than what companies charge
Consumer surplus and producer surplus are important concepts. Consumer surplus is the excess value you get from something when you pay less than you were willing to pay. I get a lot of joy out of my morning Starbucks coffee. Obviously I’ve made some money. So if my coffee cost $20, I would pay it. More

Price Discrimination: Charge Some People More

You can charge people for extras based on their propensity to pay
Are there any other microeconomic concepts, outside of zero marginal cost of replication and scale economies, that are important to understand? Price discrimination is important. It means you can charge people based on their propensity to pay. Now, you can’t charge people different amounts just because you don’t like them. More

Compounding Relationships Make Life Easier

Life gets a lot easier when you know someone’s got your back
Earlier, we talked about compound interest, but we didn’t dig into it much. Relationships offer a good example of compound interest. Once you’ve been in a good relationship with somebody for a while—whether it’s business or romantic—life gets a lot easier because you know that person’s got your back. More

Turn Short-Term Games Into Long-Term Games

Improve your leverage by turning short-term relationships into long-term ones
Do you want to talk about Pareto optimal? Pareto optimal is another concept from game theory, along with Pareto superior. Pareto superior means something is better in some ways while being equal or better in other ways. It’s not worse in any way. This is an important concept when you’re negotiating. More

Schelling Point: Cooperating Without Communicating

People who can’t communicate can cooperate by anticipating the other person’s actions
Let’s talk about Schelling points. The Schelling point is a game theory concept made famous by Thomas Schelling in his book, The Strategy of Conflict, which I recommend. It’s about multiplayer games where people respond based on what they think the other person’s response will be. More

Kelly Criterion: Avoid Ruin

Don't ruin your reputation or get wiped to zero
Let’s chat about the Kelly criterion.  The Kelly criterion is a popularized mathematical formulation of a simple concept. The simple concept is: Don’t risk everything. Stay out of jail. Don’t bet everything on one big gamble. Be careful how much you bet each time, so you don’t lose the whole kitty.  If you’re a gambler, the Kelly criterion mathematically formulates how much you should wager per hand, even if you have an edge—because even when you have an edge, you can still lose. More

Principal-Agent Problem: Act Like an Owner

If you think and act like an owner, it’s only a matter of time until you become an owner
We spoke earlier about picking a business model that has leverage from scale economies, network effects and zero marginal cost of replication. There were a few other ideas on the cutting-room floor that I want to go through with you. The first one is the principal-agent problem. More

Envy Can Be Useful, or It Can Eat You Alive

Envy can give you a powerful boost, or it can eat you alive
Do you want to tell us about jobs you had growing up and the one that kicked off your fanatical obsession with creating wealth? This gets a little personal, and I don’t want to humble-brag. There was a thread going around Twitter—Name Five Jobs You’ve Held—and every rich person on there was signaling how they’ve held normal jobs. More