Nothing More Than Econ 101

Take one idea, and take it seriously.

Morgan Housel once wrote that “being good at something doesn’t promise rewards.” He continues, “it doesn’t even promise a compliment”. Because what’s rewarded in the world is scarcity, he says, all that matters is what you can do that other people are bad at.

It makes sense. In fact, it’s nothing more than Econ 101, where every high school student learns that price is determined by supply and demand.

But when I read what Housel wrote, my first thought wasn’t to nod quickly in agreement. Indeed, I found this unexpected; a little harsh even. Yet it’s what you naturally get when you take the idea of limited resources and unlimited wants to its natural conclusion.

This begs the question: how much of the world can be explained by just one simple idea?

I think most of us would say that the answer is very little. There’s so much complexity in the world that what you need is a combination of ideas from multiple disciplines. It’s obvious when we debate something broad such as a government policy, but it’s also true in a narrower field such as physics. Not even something as ambitious as the Big Bang Theory is up to this task: it may be able to explain how the universe began and how it will end but it can’t explain why an apple fell on Newton’s head. You’d need another set of ideas for that.

But ask how much impact one idea can make and you get the opposite answer. This tweak makes all the difference. Because you’re now no longer assessing an idea based on its explanatory value, the idea doesn’t have to hold up to scrutiny all the time. Instead, an idea can derive its value from the extent to which it rewards those who uphold it. In other words, it’s no longer just about when you’re right, but also how right you are.

Take Warren Buffett.

His investing philosophy can be summed up as “margin of safety”. This sounds like an oversimplification of how investing works, but that’s precisely what he’s doing when he looks for undervalued companies. Unlike VCs who swing for the fences, Buffett’s entire approach is centred around making sure that he still generates a good return even if he’s wrong about the…

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