The coolest thing about economics is that once you learn to construct and reason with simple models of how markets work — with suppliers and users of goods competing to bid up and down the value of goods until supply matches demand — you can apply these models to gain interesting new understandings of a wide variety of phenomena outside of what we normally think of ‘economics.’ So today I want us to learn just a little bit of financial theory, and apply that theory to the question of “What the hell should I do with my life?”
So, here goes: One of the most basic, fundamental ideas in financial theory is that in a competitive market, every asset should, controlling for risk, have the same return over time. And the explanation of this is actually incredibly, incredibly simple. If two assets were equally risky but one asset was bringing a higher return (a higher yield if a bond, or a higher reliable dividend flow if a stock), everyone would want to get out of the lower-yielding asset and into the higher-yielding asset. So they would bid up the price of the higher-yielding asset, and bid down the price of the lower-yielding asset, until the two assets had the same return/yield. It’s very simple. And this theory can be extended outside of what we normally think of financial markets — the stock market, etc. — to include all kinds of investment in all kinds of things. In this simplified theoretical model, we should expect a single “rate of return” on all capital invested across all businesses and industries and asset classes as long as they are competitive and liquid. There are more or less only two ways you can beat such a competitive market: (1) you can be willing to take on a lot more risk than other people (in which case you’re not truly beating the beating the market, just tolerating more uncertainty than most, which is probably unwise overall); (2) you can be right about some prediction about the future of an asset when everybody else is wrong. Keep in mind #2 here — it’s not enough to make an accurate prediction that “this company is going to get big.” You need to make that prediction correctly when most people are arguing against it. Because if you’re right about your prediction, but other people are too, then they’ll have bid up the price of the asset. So, bottom line: you need to be right about an unusual, countercultural prediction, to beat the market. Keep this in mind for later.
Now we can do a very basic extension of this idea into another field — geography. There’s a theory in regional economics that suggests that, in a mobile world, there should be “spacial equilibrium in happiness” across different regions. Think of it this way. Every person faces the choice of whether to live in a less dense suburban/rural area or a dense city. Dense cities offer a lot of cool amenities — legacy cultural institutions, hip coffee shops, other people to network and sleep with, etc. But these amenities attract a lot of people to them, which in turn bids up the price of real-estate, makes congestion unbearable, etc, which, once it reaches a certain point, cancels out the value of some of those attractions. It’s not obvious which option — city or suburbs or country — provides an average representative person with a better quality of life. Indeed, if it were obvious, then lots of average, representative person would move from city to suburbs, or suburbs to city, thereby changing the price and congestion factors above, up until the point where the next average, representative person stayed put. You can apply this same basic idea to think about how people choose whether to live in Boston, with bad weather but lots of nice legacy cultural institutions, or Florida, with great weather, but less culture. So we predict “spacial equilibrium in happiness” across regions in this simple model.
Now, I anticipate a couple of good objections from readers. These objections will require us to modify, not completely overturn, our model here. Objection #1 is: “This can’t be true — surely people in Silicon Valley are happier than people in Detroit, Michigan.” And I’m sure they are. But this happiness differential can’t be explained by anything inhering in the regions themselves — if it were, Detroiters should simply pick up and move there. Rather, the reason people in Silicon Valley are happier is that they are largely lucky enough to have acquired a skillset that gives them a lot of power in labor markets in our technological era, allowing them to demand things they want (high income, lots of freedom) in return for their skills. That is, the people in Silicon Valley (not the place per se) are different, and that’s what makes them happier, and that’s also what makes Detroiters unable to pick up and move there. So we can have differentiation in levels of happiness so long as people have different skills that benefit them to different extents, and only some regions have industries that attract the most highly-skilled. Objection #2 is: “No, there’s no equilibrium. I am definitely, definitely a city person.” And I certainly understand this. I’m the kind of person who, at this stage in my life, feels this way. But what I’m really saying by thinking this is not, “there is no spacial equilibrium,” but rather, “I am the idiosyncratic kind of person who requires less space but more stimulation than the average person, and so that means the city is the right place for me.” That is, a rational choice about where to live involves thinking not just about what is objectively the best location, but how you idiosyncratically differ from the regular, median person who’s at equilibrium between the options. And your idiosyncracies can certainly vary over time — most of us put more weight on stimulation in our twenties, and more weight on space, decent schools, etc., in our thirties. So as long as people have variation in preferences – i.e., idiosyncracies — there can be a clear superior option for any one of them.
But the basic takeaway here is that, given that “markets” in mobility should keep different areas about equally desirable to an ordinary person, your thinking about the question “where should I live?” really hinges on the question “How am I different from the median American?” In a vague and indirect way, this parallels how you have to think about financial markets: In order to invest well, you can’t simply ask, “What industry is growing?” You have to ask, “What is everyone else wrong about?”
A very interesting application I’ve been thinking about recently, obsessively, all the time, is my career choice, which I expect to make within the year. Here’s how I’m thinking about this, theoretically. Suppose you’re a twenty-something in college. You’re pretty sharp, and expect to graduate with a decent GPA but you’re not a huge math/science/computer whiz, and don’t think you could tolerate six years of graduate research in a PhD program. Two careers that have likely occurred to you are teaching and the law. Suppose your only criterion for making this choice is: “Which will make me happiest?” Well, an interesting implication of the market reasoning we’ve been doing so far is that, if most other prospective lawyers/teachers are like you, and if they’re also asking “what will make me happiest?,” then we should expect the two to make you equally happy. Again, the reasoning is very simple. The two careers trade off different goods. Law gives you much more money and more room for promotion. Teaching gives you maybe more intellectual creativity/expression, more freedom, more personal/moral fulfillment, and less risk from taking out huge loans for law school. If it were obvious that, given this trade-off, law gave people more personal happiness, then you would expect most bright young kids like you to flood into law as a career choice. This competition to get legal jobs would, in turn, drive down the wages, or drive up the hours, of young lawyers until it was no longer so clear that law was the better option.
Now I hope you can see what I’m getting at here. If there are lots of people like you “competing” to find happiness, and people like you have a certain set of career options, you should expect all of those careers to provide about equal amounts of happiness. If one were a much better option, people would flood to that career, increasing the ‘supply’ of labor in that market, which would weaken each individual worker’s position, until the two careers provided equal happiness. So we expect “happiness equilibrium” among the careers available to a given person. Am I saying that people in different careers are equally happy? No. I’m sure Google software engineers are generally happier than tax drivers — but this differential is explained by differences in skill sets, influenced by luck and path-dependent choices that trace back to early childhood. That is, it is explained by the fact that, at this point, a cab driver cannot become a programmer and thus restore equilibrium.
So let me make the relevance clear here, by going from theory to my actual dilemma: I need to decide what to do with my life. I need to think about a couple of things. First, there’s one fundamental constraint: I need to supply the world with a good that it demands, in order to make a living, and in order to be an adult. Beyond that, I want (who wouldn’t?) to achieve above-average happiness. Now, our theory suggests this should be hard to do — since there are a lot of other people like me competing for happiness, they’d all have shifted into any career path that would have made me especially happy. How can I ‘beat the market’ in happiness? Let’s go back to our two examples so far. The way to beat a financial market is to (1) take a huge risk, or (2) find something that everybody else is wrong about. (1) isn’t for me. I’m frankly risk averse — being in a position to provide for a family within the decade at the latest is pretty much a non-negotiable priority for me. (2) would be great, if I could find it — but, if I think I’ve found a career everyone else is wrong about, I would need need to have very good reason for thinking I’m right and everyone else is wrong. So let’s keep (2) in mind. Now think about the geography example. How did we beat the spacial equilibrium in happiness between regions? Again, the key is not to think about regions per se, but to think about how I differ from the median person — not, “what do I value,” but, “what do I value more, relative to others?” This seems very applicable to a career choice. If I’m unusual in some way, that gives me a way to get past the career equilibrium in happiness. If I really, genuinely, care about money much less than a typical person, that fact makes me different from the median person who is keeping those two careers in happiness equilibrium, and I should choose teaching over law.
So I need to find something that I can do that (1) is useful to the world, as represented by people being willing to pay for it, and (2) that particularly appeals to my particular idiosyncracies. In other words, I need to find some weird thing about me that is useful. I need to find my own personal monopoly, to prevent other people from competing away my above-market rate of happiness. Weird — idiosyncratic to me — and useful to the world. Those are the keys to career success. I should also keep an eye out for (3) a career that, maybe, for some strange reason, people are really wrong about.
As a middle-schooler I thought I wanted to be a professional long-distance runner; as an undergraduate, I thought I wanted to spend the rest of my life reading and writing essays on German philosophy. But criterion #1 eliminates these career options — it’s hard to get people to pay you to do these things precisely because people’s unmet needs in these spaces (4-minute miles from wan, gangly runners, and commentaries on Nietzsche) aren’t very large. #1 even may eliminate the possibility of journalism — it’s not clear what unique role full-time journalists have in the modern era, in which experts can reach the public directly via their blogs and Twitter feeds, and this is precisely why it’s so hard to get paid for writing as a career. So what else? Well, let me start out with criterion #2. Here’s something that’s weird about me: I really, really, genuinely love a lot of ideas in economics, business, and finance that other people think are really boring and dry. It’s one of the strangest things about me. Another weird thing about me is that, I’ve been told, I’m decently good at explaining these ideas to others. So if I can find a way to make providing these ideas useful to the world, that would seem to be my answer.
What are some options for doing that? One path seems to try to become a business-school professor — it’s not exactly the future I envisioned when I was dreaming of Olympic glory and Nietzsche’s reinvention of Dionysus, but it may be the place where the particular, idiosyncratic goods that I can supply best match up with the goods that the world is demanding. And the world is demanding more business education. Lucky kids like me get to dabble in liberal arts for four years and land on our feet. But, with our relatively bleak economic future, more and more people will want education that will, first and foremost, prepare them for a job. Managing supply chains, understanding markets, knowing how to do basic accounting — these things don’t sound super glamorous, but the people who do these things support the economic system that preserves the affluence and comfort and security ordinary people enjoy in America today. I’d be happy and proud to teach and prepare people for these functions in business careers.
Here’s one last thought on my career choice: We understood above that the best way to do well in a market is to find something that other people are really wrong about, or not competing for, for some reason. There’s a funny, salacious example of how this actually plays out. Economic theory suggests that every industry, asset, and product should, over time, provide about an equal rate of return and profit over time, due to competition. But I’ve read that there’s one product that, apparently, provides an abnormal rate of return: condoms. The reason for this is something we could call “embarrassment premium.” A lot of firms simply can’t find a way to announce in their annual reports that they are entering the relatively virginal territory of the condom market, without blushing. So the prices of condoms and other “embarrassing” goods haven’t been competed down fully. Can I find something similar in a career choice? My latest — somewhat inchoate thinking — is, yes. “Accounting” — the word itself — is such a turnoff to so many people, that business schools face a shortage of accounting professors, even though “accounting” refers very simply to the study of business information, and so the field provides the opportunity to research almost anything in economics. So my market reasoning suggests that the ideal career path involves finding the place where your personal idiosyncracies meet up with the world’s needs, and maybe finding something a little embarrassing, too — finding, in short, your weirdest useful proclivity.
This has been a kind of long, ranging, and at times personal post. But I hope the major takeaways for my readers are not about these specific issues (and certainly not about myself!) but about how to apply market-reasoning in surprising places. The basic financial theory — that competition should drive all assets to, over time, provide approximately the same value — can be applied to a lot of other arenas in which we face competition. A lot of parents these days think they can give their kids a leg up by teaching them Mandarin and computer programming. Teaching kids these skills is, I think, useful for its own sake, but it probably won’t give them advantages in the future, for the simple reason that other parents are also thinking the same thing, providing their kids with the same skills, which will compete down the value of those skills in the future. In order to give your kids a leg up, it’s not enough to find something that will be useful to them in the future — you need to find something that other parents, who are competing with you to provide their kids with useful skills, are missing/wrong about. Before you start your own business, it’s not enough to ask, “Is my business in lucrative and growing field?” You have to ask whether there is some reason that you are uniquely well-positioned to provide a particular good — otherwise, your profits and income will get competed away.
One last caveat: All models are imperfect. But I think the greatest imperfection in what I’ve written here is that I’ve written as if people’s preferences and idiosyncracies are static. That is, this post accepts a kind of Platonic ideal in which a person has a permanent True Self with permanent qualities and characteristics, and that attempts to change or alter our tastes and idiosyncracies are an inauthentic betrayal of self. But I think the truth is that our brains are plastic and flexible, and we can, through effort, force ourselves to develop new tastes and likes and idiosyncracies. I think this is important for every young person to keep in mind in thinking about career choices. And I also think that, given that, our society ought to be doing a better job of urging young people to try to develop tastes for things that will also be useful to the world. Looking back, at my now-advanced age of 24, I wish that when, as a college freshman, I had said, “I do not like computers; I only love Nietzsche,” someone had told me, “Well, work your ass off at an introductory programming course, until you do love it. You are capable of loving it, as some do; and if you did, it would be extremely useful to you. So screw your courage to the sticking place and try to change yourself into a person whose loves are more compatible with the needs of the real world.”