Ask HN: How much economics as an entrepreneur should i know?
Well I mean if you think about it. Economics seems to be a really important skill one can have while starting his startup. I mean a lot of things come into play creativity, empathy (psychology), maybe some sort of philosophy (helps take a moral and ethical decision), obviously Computer science too.
But as coming to economics I am blank so as a new entrepreneur i want to know from you guys who have already done it and already doing it. Which pieces of economics are really important.
In terms of psychology even if you can tell me something about Biases and common dilemmas that would be great to share too.
18 comments
Plenty. A consequence of being a founder is that you will have to report results. As well as financial projections. Even if its just to yourself and your "executive team" of one other co-founder. More probably on an investor conference call. Or in legally-actionable board meeting minutes. Perhaps it may even occur live one morning on CNBC's Squawk Box.
You need to know the finances of your own company. And need to know the economics of your chosen space. Cold.
To grow, you need to design for growth. And communicate your business objectives with crystal clarity. To speak intelligently and forthrightly requires you to master the language of entrepreneurship. It begins with your peer network. Reach out to other founders, even competitors. Go to events. Don't be afraid to cold email. Ask direct questions relating to everything and research every concept you don't know.
Also begin a steady diet of news: Economist, Bloomberg, FT, WSJ, Reformed Broker. Treat it like you would an essential component of your startup's "culture". Because you may think the fact that 10Y US Treasury yields are holding above 2.40% doesn't directly effect your company. But it does.
The advantage to begin mastery of econ in your 20s, is that a decade later when you hit 30 and need to make long term decisions out of necessity, it will no longer be guesswork. You'll know mathematically what your risk appetite is. And know on an instinctual level, what separates a good investment from the pack.
As for the social science side, there is no better place to start than the "Neuroeconomics" work of this year's Nobel Laureate Richard Thaler. Start on "Nudge" and "Misbehaving". True game-changers. And then onto Daniel Kahneman's "Thinking Fast and Slow".
And do give credence to the classic that kicked it all off: Adam Smith and "The Wealth of Nations". As important as Descartes, Kant, Locke, Rousseau and Jefferson to our modern world.
Best of luck, dprophecyguy!
You need to know the finances of your own company. And need to know the economics of your chosen space. Cold.
To grow, you need to design for growth. And communicate your business objectives with crystal clarity. To speak intelligently and forthrightly requires you to master the language of entrepreneurship. It begins with your peer network. Reach out to other founders, even competitors. Go to events. Don't be afraid to cold email. Ask direct questions relating to everything and research every concept you don't know.
Also begin a steady diet of news: Economist, Bloomberg, FT, WSJ, Reformed Broker. Treat it like you would an essential component of your startup's "culture". Because you may think the fact that 10Y US Treasury yields are holding above 2.40% doesn't directly effect your company. But it does.
The advantage to begin mastery of econ in your 20s, is that a decade later when you hit 30 and need to make long term decisions out of necessity, it will no longer be guesswork. You'll know mathematically what your risk appetite is. And know on an instinctual level, what separates a good investment from the pack.
As for the social science side, there is no better place to start than the "Neuroeconomics" work of this year's Nobel Laureate Richard Thaler. Start on "Nudge" and "Misbehaving". True game-changers. And then onto Daniel Kahneman's "Thinking Fast and Slow".
And do give credence to the classic that kicked it all off: Adam Smith and "The Wealth of Nations". As important as Descartes, Kant, Locke, Rousseau and Jefferson to our modern world.
Best of luck, dprophecyguy!
During your undergrad you learn so much "classic" economics you start to believe its true. Then in your graduate education in economics you learn that this is basically all bullshit.
Then, you look outside the windows and none of it makes any sense. Some economics, or rather, basic mathematics is nice to have. But startups are counterintuitive, and hence the only economics you need to know are the economics of scale.
Then, you look outside the windows and none of it makes any sense. Some economics, or rather, basic mathematics is nice to have. But startups are counterintuitive, and hence the only economics you need to know are the economics of scale.
I'm not an entrepreneur, MBA, or econ major (did take some classes in college, continually read up on the subject), so take this with a grain of salt.
There's a tremendous amount of overlap and shared concepts, but probably going to need to know more about business/finance than economics per se.
Some of the busywork can be farmed off to an accountant/lawyer, but you'll need to understand pricing, unit economics, profit and loss and basic accounting principles. If you're interested in taking investors, you'll need a very good understanding of terms and preferences to avoid getting screwed, and you'll need to be able to talk about business plans realistically to make a pitch. If you start to take on multiple employees, there is a tremendous amount of knowledge (both intuitive and book-learning) about organizational behavior and management that you'll need to internalize.
There's a tremendous amount of overlap and shared concepts, but probably going to need to know more about business/finance than economics per se.
Some of the busywork can be farmed off to an accountant/lawyer, but you'll need to understand pricing, unit economics, profit and loss and basic accounting principles. If you're interested in taking investors, you'll need a very good understanding of terms and preferences to avoid getting screwed, and you'll need to be able to talk about business plans realistically to make a pitch. If you start to take on multiple employees, there is a tremendous amount of knowledge (both intuitive and book-learning) about organizational behavior and management that you'll need to internalize.
I just want to add to this that accounting is extremely figured out in a lot of ways, and so learning it well will help you run your business better even if you are not doing the grunt labour. If you understand the ebbs and flows and trends of your particular business it is inevitably going to be tied to the concrete accounting data- economics is the same way. It tries to take the concrete and extract trends from it to understand how stuff works. If you are also working on a B2B sort of operation, accounting is part of the lingua franca. If you are completely naive to it you will be surely less off.
I was an economics major (also technical) who started his own company in college. Generally it doesn't help, or at least not that I noticed.
Economics is mostly theory about how the world should operate based on certain laws... supply and demand etc. They go through rigorous derivations using calculus and statistics. You might get a top level overview of the driving forces behind an industry, but in a startup that's hardly useful.
Also in microeconomics, you are taught how a prototypical consumer might behave under canned conditions. Not at all representative of the real world.
There's really a single law book for running startups, and the first commandment is talk to your customers. Literally everything else is bs, at least in the beginning stages.
Economics is mostly theory about how the world should operate based on certain laws... supply and demand etc. They go through rigorous derivations using calculus and statistics. You might get a top level overview of the driving forces behind an industry, but in a startup that's hardly useful.
Also in microeconomics, you are taught how a prototypical consumer might behave under canned conditions. Not at all representative of the real world.
There's really a single law book for running startups, and the first commandment is talk to your customers. Literally everything else is bs, at least in the beginning stages.
I feel like we took different values from an economics degree. I also have one, but it wasn't really the details about Macro or Micro at an intro level (which is where you get told all these laws, before more advanced stuff just tells you how they aren't quite right). It's more about a way to think about a problem or set of problems. The only hard skill that I'd say I got out of it was being able to do regression analysis (which has proved useful many times). But the more valuable skill was opening my mind to another way to look at and approach problems. Certainly the vocabulary and basic understanding of the area also helps when dealing with business. It's not the only lense to look at a problem, but as an entrepreneur, I think it's one I have to look through a lot and quite regularly. Something as simple as opportunity cost, that's a daily trade off at a startup. Knowing some behavioral economics might help you make better and more informed decisions rather than simply going with your gut in situations where you gut might be misleading you. That's maybe harder to quantify, but I think it helps more than you give credit.
I have a finance career and am also the technical partner of a startup. This answer mirrors my opinion. Economics is nearly 100% theoretical and not useful at all for entrepreneurship which is nearly 100% practical.
Most other answers here are confusing finance or accounting or business-sense for economics... which shows how little they know about economics. And by the way, formal finance and accounting also has little value for an entrepreneur too (just hire an accountant).
My startup partner has a background in marketing and is doing great building the business (while being inept in finance, accounting, technology or economics). If you aren't familiar with marketing, as said above, it's all about knowing your customers.
Most other answers here are confusing finance or accounting or business-sense for economics... which shows how little they know about economics. And by the way, formal finance and accounting also has little value for an entrepreneur too (just hire an accountant).
My startup partner has a background in marketing and is doing great building the business (while being inept in finance, accounting, technology or economics). If you aren't familiar with marketing, as said above, it's all about knowing your customers.
Thanks, danm07, now it makes sense often time people don't differentiate in between knowledge and applied skills. I was asking for things that are applied in real world and also take me better decision talking to customers is also the way I am moving forward too.
Not really an answer to your question but Joel Spolsky has an interesting article regarding economics and open source: https://www.joelonsoftware.com/2002/06/12/strategy-letter-v/
An understanding of basic concepts such as supply and demand and the theory of price is essential if you want to run a sustainable business. A common fallacy for example is to calculate prices based on costs instead of the value one creates for one's customers.
Other than that knowledge about accounting and being able to read various kinds of reports in particular are highly useful skills as an entrepreneur. That's not economics in the stricter, scientific sense of the word though.
Other than that knowledge about accounting and being able to read various kinds of reports in particular are highly useful skills as an entrepreneur. That's not economics in the stricter, scientific sense of the word though.
As an entrepreneur, I'm not sure economics is very applicable on your day to day tasks.
However, it is a very useful framework for thinking when it comes larger abstract stuff like strategy and vision. I use a very basic supply and demand graph and I think you can get pretty far with simply understanding factors that shift those lines.
However, it is a very useful framework for thinking when it comes larger abstract stuff like strategy and vision. I use a very basic supply and demand graph and I think you can get pretty far with simply understanding factors that shift those lines.
A general understanding might help, but IMO knowing specifics is not necessary. I've known plenty of entrepreneurs that have little to no understanding of economics.
In addition, economics can get quite political. Again, a general understanding of why it's political can help here, but specifics are not necessary.
In addition, economics can get quite political. Again, a general understanding of why it's political can help here, but specifics are not necessary.
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Not important at all in my experience. Build something people will pay for. That is the biggest stumbling block for most entrepreneurs.
All this stuff comes into play once you have already become successful and scaled.
All this stuff comes into play once you have already become successful and scaled.
You should understand the basics of Macro and Micro Economics imo.
For example, something as simple as supply and demand concepts will make you understand a lot of stuff.
For example, something as simple as supply and demand concepts will make you understand a lot of stuff.
There are a number of behavioral economics concepts that can have varying degrees of practical usefulness for your business, depending on the industry, but are (imo) all useful as food for thought in your day-to-day decision making processes.
-The Decoy Effect (https://en.wikipedia.org/wiki/Decoy_effect)
The decoy effect highlights the importance of thinking through the structure of tiered product pricing. If you're wondering why newspaper sites like the Economist or WSJ offer digital+print subscriptions that are closely, if not identically, priced to just print subscriptions, this concept helps explain that. Essentially, when you have a menu of prices, carefully creating one or two throwaway options helps make your other offerings seem much more reasonable.
(See the related concept of anchoring below)
For some real world examples, see:
https://www.economist.com/blogs/democracyinamerica/2009/05/t...
http://www.nytimes.com/2006/10/21/dining/21plate.html
-Base Rate Neglect (https://en.wikipedia.org/wiki/Base_rate_fallacy)
This explains why many people ignore general prior probabilities, and focus on specific given probabilities. Give the Wiki a read, there are some pretty stark examples of decision making gone wrong.
A closely related example of this from Bayes' Theorem is the following classic: http://sphweb.bumc.bu.edu/otlt/mph-modules/bs/bs704_probabil...
Base rate neglect can help explain why people dramatically overestimate the accuracy of things like medical tests. Understanding what a "99% accuracy rate" really means can have life changing consequences.
-Sampling Bias (https://en.wikipedia.org/wiki/Sampling_bias)
This serves as a counterpoint to a practice some of the other commentators in this thread have mentioned, i.e. "asking your customers". If your end goal is to serve a diverse set of customers, it's essential that the sample of potential customers you're asking is not biased in some extreme way. For example, asking customers who are only from a specific geographic region, are only of a specific size in terms of headcount, revenue, etc.
I can't find the exact HN discussion, but there was a post that was a stark example of this a few months back. The gist of the post was that someone had built a software business that was able to address a niche accounting problem that many of his local plumbers (electricians maybe?) faced. He grew it to $500,000 in revenue relatively quickly, only to find that very few other plumbers across the country had this accounting challenge. This entrepreneur eventually shuttered his software business, since future prospects for growth were negligible.
-Anchoring Bias (https://en.wikipedia.org/wiki/Anchoring; see in particular the "negotiations" section)
Anchoring has direct applicability in pricing and negotiations. IMO anchoring bias is why if you feel that you are charging too little for your product, raise your prices sooner rather than later. After a certain amount of time, your customers will be "anchored" to that previous price point, and will be quite unhappy with a price increase.
-Sunk cost fallacy (https://en.wikipedia.org/wiki/Sunk_cost#Loss_aversion_and_th...)
This fallacy is quite prevalent in the real world. It's particularly egregious in the defense contracting world, where defense contractors have convinced the US Congress to fund projects that are years behind schedule, and billions over budget. The fallacy can best be described as "throwing good money after bad".
I'd like to note that sometimes this concept is over-applied. If you budgeted $10 for a project, and at the $10 spent mark you discover you need to spend $1 more to complete it, it's not necessarily falling into the fallacy to spend that $1 if the end benefit from that completed project still justifies the overall cost.
-The Decoy Effect (https://en.wikipedia.org/wiki/Decoy_effect)
The decoy effect highlights the importance of thinking through the structure of tiered product pricing. If you're wondering why newspaper sites like the Economist or WSJ offer digital+print subscriptions that are closely, if not identically, priced to just print subscriptions, this concept helps explain that. Essentially, when you have a menu of prices, carefully creating one or two throwaway options helps make your other offerings seem much more reasonable.
(See the related concept of anchoring below)
For some real world examples, see:
https://www.economist.com/blogs/democracyinamerica/2009/05/t...
http://www.nytimes.com/2006/10/21/dining/21plate.html
-Base Rate Neglect (https://en.wikipedia.org/wiki/Base_rate_fallacy)
This explains why many people ignore general prior probabilities, and focus on specific given probabilities. Give the Wiki a read, there are some pretty stark examples of decision making gone wrong.
A closely related example of this from Bayes' Theorem is the following classic: http://sphweb.bumc.bu.edu/otlt/mph-modules/bs/bs704_probabil...
Base rate neglect can help explain why people dramatically overestimate the accuracy of things like medical tests. Understanding what a "99% accuracy rate" really means can have life changing consequences.
-Sampling Bias (https://en.wikipedia.org/wiki/Sampling_bias)
This serves as a counterpoint to a practice some of the other commentators in this thread have mentioned, i.e. "asking your customers". If your end goal is to serve a diverse set of customers, it's essential that the sample of potential customers you're asking is not biased in some extreme way. For example, asking customers who are only from a specific geographic region, are only of a specific size in terms of headcount, revenue, etc.
I can't find the exact HN discussion, but there was a post that was a stark example of this a few months back. The gist of the post was that someone had built a software business that was able to address a niche accounting problem that many of his local plumbers (electricians maybe?) faced. He grew it to $500,000 in revenue relatively quickly, only to find that very few other plumbers across the country had this accounting challenge. This entrepreneur eventually shuttered his software business, since future prospects for growth were negligible.
-Anchoring Bias (https://en.wikipedia.org/wiki/Anchoring; see in particular the "negotiations" section)
Anchoring has direct applicability in pricing and negotiations. IMO anchoring bias is why if you feel that you are charging too little for your product, raise your prices sooner rather than later. After a certain amount of time, your customers will be "anchored" to that previous price point, and will be quite unhappy with a price increase.
-Sunk cost fallacy (https://en.wikipedia.org/wiki/Sunk_cost#Loss_aversion_and_th...)
This fallacy is quite prevalent in the real world. It's particularly egregious in the defense contracting world, where defense contractors have convinced the US Congress to fund projects that are years behind schedule, and billions over budget. The fallacy can best be described as "throwing good money after bad".
I'd like to note that sometimes this concept is over-applied. If you budgeted $10 for a project, and at the $10 spent mark you discover you need to spend $1 more to complete it, it's not necessarily falling into the fallacy to spend that $1 if the end benefit from that completed project still justifies the overall cost.
> If you budgeted $10 for a project, and at the $10 spent mark you discover you need to spend $1 more to complete it, it's not necessarily falling into the fallacy to spend that $1 if the end benefit from that completed project still justifies the overall cost.
It's not the sunk cost fallacy even if the benefit of completion only justified the additional $1 cost; the $10 already spent is irrelevant, since if you choose not to finish, you don't get it back, it's only the sunk cost fallacy if you are treating the cost already spent as a loss of not proceeding.
You sort of did the opposite fallacy, where instead of treating the sunk cost as a loss if you don't proceed, you counted it as a loss if you do. But the sunk cost is neither.
It's not the sunk cost fallacy even if the benefit of completion only justified the additional $1 cost; the $10 already spent is irrelevant, since if you choose not to finish, you don't get it back, it's only the sunk cost fallacy if you are treating the cost already spent as a loss of not proceeding.
You sort of did the opposite fallacy, where instead of treating the sunk cost as a loss if you don't proceed, you counted it as a loss if you do. But the sunk cost is neither.
> It's not the sunk cost fallacy even if the benefit of completion only justified the additional $1 cost; the $10 already spent is irrelevant, since if you choose not to finish, you don't get it back, it's only the sunk cost fallacy if you are treating the cost already spent as a loss of not proceeding.
Fair point, I should've said if the total benefit of completing the project is larger than the marginal cost ($1) of completing the project.
> You sort of did the opposite fallacy, where instead of treating the sunk cost as a loss if you don't proceed, you counted it as a loss if you do. But the sunk cost is neither.
Just to be clear, if the total benefit from completing the project is something like $0.50, choosing to spend the $1 to complete the project is an example of the sunk cost fallacy.
Fair point, I should've said if the total benefit of completing the project is larger than the marginal cost ($1) of completing the project.
> You sort of did the opposite fallacy, where instead of treating the sunk cost as a loss if you don't proceed, you counted it as a loss if you do. But the sunk cost is neither.
Just to be clear, if the total benefit from completing the project is something like $0.50, choosing to spend the $1 to complete the project is an example of the sunk cost fallacy.