Principle Based Management™ (PBM), formerly known as Market-Based Management®, provides a holistic approach to making decisions, solving problems, and creating value for individuals in your community, team members in your organization, and society at large. In this PBM 101 series, we’re unpacking mental models, ideas, and tools that can help you reach the next level in your work.
Looking for a way to make better decisions? The great news is that you already have the skills you need—if you can just learn how to nurture them.
We call these skills “economic thinking”. In Principle Based Management, economic thinking is one of the core “knowledge processes” which include intellectual honesty, experimentation, and healthy debate. Economic thinking suggests that cost-benefit analyses can help you navigate decisions to become a better leader.
However, we also make “knee-jerk” decisions and fall into decision-making traps that don’t always make the best use of our time and resources.
As a nonprofit leader, deciding how to use resources is not just about keeping your organization running smoothly but about empowering people to transform their lives and transforming your community. When you learn to avoid common pitfalls and to use economic thinking to your advantage, you help ensure you’re doing the best you and your organization can to serve the people you care about. Simply put, you can use economic thinking to excel in the work you feel called to do.
Ready to give it a shot? Below are three economic thinking ideas you can practice and apply on a regular basis to become a more effective social entrepreneur.
The true cost of something is different than you think.
What’s one important thing you did yesterday? Now consider something else important you could have done instead. The “something else” that you didn’t do represents your opportunity cost.
Economists often refer to the opportunity cost as the true cost of the activity—it’s the benefit you said no to, the potential impact you could have had. In making your decision to, say, go bowling with a friend, you missed out on the impact of reading with your nephew. Now consider. Was it worth it? If so, great. You made the economically sound decision. If not, now you know more of the true cost of going bowling.
In your organization, you might be considering whether to provide many wraparound services or one focused service. The opportunity cost is the most valuable impact you’re missing out on because of your choice. There is always a choice; there is always something we’re missing out on. For instance, if you choose the wraparound option, you might end up spreading resources too thin and miss opportunities to double down on one or two of the most impactful services.
In a world of many options, it is easy to choose something good at the cost of something great. When caught up with choices, take a moment to consider the opportunity cost. And choose something great.
Treat sunk costs as sunk.
Nonprofit leaders are passionate about their work. That can make it hard to walk away when decisions aren’t working as expected. But when we stick with it too long because we don’t want to feel as if our past efforts are wasted, we commit a critical thinking error. We fall into what’s known as the sunk cost trap.
A sunk cost is an unrecoverable past expenditure. That means no matter what you do, you can’t get that investment—that time or money—back. It’s sunk. Leave it sunk. Sail on.
Of course this is easier said than done. We’ve all been there. (“I’ve been coaching this employee for five months now—maybe one more month will do the trick.” “We’re on our 5th iteration to make this database work—we’ve invested too much to give up now.”)
Resist the temptation to stick it out merely because of the sunk costs. Follow what the best thinkers do, and focus not on past efforts, but on the expected payoff of future efforts.
Move beyond averages.
Economic thinkers decide “at the margin”, which means they evaluate costs, benefits, and likely results by evaluating what happens when an additional thing (one “unit”, in economic terms) is added or removed to a scenario.
Imagine you run an educational program that hosts tours at the state capitol. You know that the average cost of each student is $300. If you want to bring one more kid, you’ll need another $300 to cover your costs. But, if your bus can only carry 30 students, the 31st student won’t cost you $300—they’ll cost you $300 plus the rental cost of a second bus.
The “marginal cost” might change significantly based on several factors—not just one—and it’s easily overlooked if you’re used to looking at averages.
You can use “thinking at the margin” in a variety of ways. For example, consider the factors that shape the cost of:
- Adding a new employee to a team
- Raising an additional dollar of funding
- Providing one more unit (hour, course, etc.) of programming to a client
Go forth and think in new ways.
The term “economic thinking” can feel daunting. But it’s not as lofty of an idea as it sounds. You don’t need to have an economics or mathematics background to use economic thinking in an intentional and impactful way. Even these three simple adjustments to your daily decision-making can improve the impact that you, your team, and your organization are capable of.