How My Economics Degree Has Helped Me as a Product Manager
Updated: Feb 27, 2020
I've heard the criticism that Economics is a bad major choice because its not "a hard skill". This post is meant to debunk that myth.
As an entrepreneur and then as a product manager at a tech startup, I found my economics major to be extremely valuable almost every day since I graduated college.
I've found that business people without basic economics education miss the big picture and don't focus enough on incentives. In product management and entrepreneurship you NEED to see the big picture and implement proper incentives. Without those, all the "skill" and detail work doesn't matter.
There is nothing so useless as doing efficiently that which should not be done at all. - Peter Drucker
In a world of finite resources, product managers and entrepreneurs are in charge of maximizing resources. Economics is a great major to teach people the theory behind resource allocation. It also teaches you how to reason, and articulate a logical argument.
Below are some of the concepts in economics and how I've used them.
An Opportunity cost is a benefit, profit, or value of something that must be given up to acquire or achieve something else. Since every resource (land, money, time, etc.) can be put to alternative uses, every action, choice, or decision has an associated opportunity cost.
In Economics you are taught about opportunity cost which essentially means, “Every decision has a tradeoff."
This concept couldn’t be more relevant than in product management and entrepreneurship. Because of opportunity cost, it's impossible to accommodate every use case when making a product.
If you fall prey to the temptation of trying to accommodate every use case in your product, it leads to an unusable piece of junk.
Economics also teaches you that even if you break even on a project, you haven’t broken even, you’ve actually lost. Those same resources you invested in the ‘break-even’ project could have put towards a profitable project.
Sunk Cost Fallacy
In economics and business decision-making, a sunk cost is a cost that has already been incurred and cannot be recovered. Therefore, a rational person should not incorporate sunk costs into their decisions.In reality, most people’s decisions are tainted by the emotional investments you accumulate, and the more you invest in something the harder it becomes to abandon it.
In other words, the sunk cost fallacy reminds one not to fall pray temptation to throw good money after bad.
Regardless of how long you’ve spend on a product, you should always be determining your next actions by looking forward, not backward.
For example, let's say you’ve spent millions of dollars and a couple years building a piece of junk that no one uses. Saying “Well we can’t just start over because we’ve used all these resourced to build this” is not rational thinking.
Economic incentives are what motivates you to behave in a certain way, while preferences are your needs, wants and desires. Economic incentives provide you the motivation to pursue your preferences.
Economics teaches you that every action is driven by incentives. People will react to the incentives you give them.
The best company align their own interests with their customer’s incentives. You can drive user/customer behavior with the right incentives. Often, when there is a problem with the business model or product its an incentives issue.
Cost Benefit Analysis
A method of reaching economic decisions by comparing the costs of doing something with its benefits.
Economics classes teach you to analyze situations very rigidly with ruthless Cost Benefit Analysis. It's important to be able to separate emotions from facts in the real world.
Variable Cost vs Fixed Cost
In economics, variable costs and fixed costs are the two main costs a company has when producing goods and services. A variable cost varies with the amount produced, while a fixed cost remains the same no matter how much output a company produces.
Although this seems like a common sense concept, many people who aren’t trained in economics don’t always grasp it.
What is your breakeven cost on a project? How long will it take you to breakeven. What is your expected gross margin after breakeven? All of these are important questions to KNOW to ask.
Economies of Scale
Bigger is often better. In many industries, as output increases, the AVERAGE cost of each unit produced falls. One reason is that overheads and other FIXED COSTS can be spread over more units of OUTPUT.
Economies of scale, just like compounding interest, is a very powerful concept. When building a product, how will it be able to take advantage of economies of scale? How do you avoid diseconomies of scale. Although economics doesn’t teach you the specific answers to these questions, it teaches you to always be thinking about what questions to ask.
Where Economics Curriculum Falls Short
Often times our strengths are often our biggest weaknesses. This is also true for economics.
Economists can be extremely rational, and thus ignore the reality that others’ decisions are often based on emotions, not just incentives and rationality.
The truth is outside of academia, people aren’t rational computers going around making decisions based on rigid cost benefit analysis.
For example, let's say a company has spent a ton of resources on a product that no one buys. The people that have spent years of their life on the product are inherently going to fall prey to the sunk cost fallacy.
The ability to communicate principles of economics to the normal person is left out of economics classes. Therefore, economists can come off as headstrong jerks and aren’t always as effective.
Economics + Psychology would be a powerful double major.
Anyone Can Learn Economics
Although, Econ is a great major, you don't have to go to school to learn it.
Here is a great free youtube channel.
Economics is a Great Major For a Product Manager or Entrepreneur to Have
I would argue in today’s world the ability to understand the big picture and make great decisions is more important than hard skills. Economics helps you make optimal decisions in business and in your life.
Yes its true having Economics Major on your resume might not land your first job (most business majors won't), but it will absolutely help you in your business career.
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