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Law of Diminishing Returns by Celes

Law of Diminishing Returns

Wikepedia Law of Diminishing Return

When I studied economics in junior college, I learned about the law of diminishing returns, referring to a phenomenon encountered in labor and production. If you studied economics before, that wouldn’t be new to you.

Let’s say you have a plot of land growing maize. You want to use fertilizer to get the maximum yield (other conditions such as sunlight, water and oxygen are already in place). Fertilizer is the input, and yield is the return. However to do that, you need to understand two principles:

(1) Every additional unit of fertilizer generates a different increase in yield. The first few units probably gives a burst in yield compared to without fertilizer. After that, adding more fertilizer will still give more yield, but at a decreasing rate.

(2) There is an optimal point where adding X amount of fertilizer which will give you maximum yield. This is known as the point of diminishing returns. Any additional fertilizer beyond that will lead to a smaller increase in yield which does not justify the cost of buying more fertilizer. This is where the law of diminishing returns kicked in. The law refers to how every additional unit of input you put in leads to lesser and lesser additional output.

law-of-diminishing-returns

(3) If you continue to keep adding beyond that the point of diminishing returns, you will reach a stage where not only does your output not increase, your overall output decreases! In the case of the fertilizers, your overall yield will decrease because your crops get damaged or even killed.

Here’s another example – If you run a big restaurant and only have a cook, you are only going to get Y amount of cooked meals. Adding more cooks will definitely result in higher supply of cooked meals – initially. After that, you will reach a point where your additional output per new cook decreases instead even though the new cooks you are hiring have the exact same level of expertise as the existing ones. That’s because there is a limited number of kitchen supplies (pots, pans, stove, etc) which they can use.

If you continue to keep hiring beyond that point, you will hit a stage where overall output decreases with every new cook! That’s because everyone is going to start jostling and competing for kitchen supplies inside the kitchen, which results in a chaotic situation and affects the work of existing cooks. Cooking will less effective than if there are lesser cooks. This is also what they mean when they say ‘too many cooks spoil the broth’. ;)
Law of Diminishing Returns in Our Life

So how does this apply to the domain of personal growth? Everywhere! :D If you look closely, you can see this law in effect in different areas, probably more than you are normally aware of:

* Learning curve: After working at a new workplace for a period of time, your learning curve starts to slow down
* Daily work: After spending X amount of time at a certain task, your level of output decreases
* Recreation: After playing games/watching shows/engaging in your hobby for X number of hours, your enjoyment level decreases
* Sleep: After sleeping for X amount of hours, the amount you get rejuvenated by becomes smaller
* Exercise: After exercising for X amount of time, the amount of exercise you can do becomes lesser
* Friends: After spending X amount of time with your friends consecutively, your additional utility you get from hanging out decreases
* Eating: After eating X amount of food, your satisfaction of the additional food becomes lesser
* And many, many more

The ability to recognize the point of diminishing returns and cut off further activity from that point onwards can result in a huge benefits. These benefits can manifest in the form of increased productivity, fulfillment, happiness and vitality, depending on what area you are using it in.

If you are not conscious of the point of diminishing returns, you will fall into the trap of investing more input then your return is worth. That results in ineffective usage of your energy. This is something neurotic perfectionists are often guilty of. They keep hammering at a task, refusing to let go of it even till the last minute, because they want to beat them into perfection. In trying to fulfill their satisfaction of having a ‘perfect’ or near perfect outcome, they jeopardize the bigger picture. The effort they invested in trying to get the last few nuggets of output in place could have been more effectively spent in generating a lot more output in tasks. This is why quitting to win is so important.

The law of diminishing returns is related to the 80-20 rule. With 80-20 rule, 20% of your effort usually leads to 80% of output. The law of diminishing returns kicks in beyond the 20th percentile. With every additional unit of effort after the 20th percentile (this figure is dependent on the situation nature), the amount of output you get in return is minimal.

How do you find the point of diminishing returns then? It’s easy when the task is something quantifiable (such as with money, weight loss, time, etc). However, it gets tricky if you are involving intangibles, such as amount of happiness, fulfillment, quality of written work, and so on.

There isn’t a hard and fast rule to identify this. Obviously, if there is a radar that goes off whenever we hit the point of diminishing returns, that’ll make things a lot simpler ;) My advice is to use your gut feeling. Get a good sense of when you think you are not getting your worth of returns for the effort you are putting in. The best way to develop your gut is (1) keep building up your experience (2) constantly evaluate and exercise your gut every step of the way.

The point of diminishing returns doesn’t remain there forever. With increased skill level through leveling up, it takes more input for you to hit the point where you are getting negative output. When I initially started off writing posts at my blog in Dec ’08, the quality of the writing started to decrease in the 3rd hour of writing or so. After 6 months of experience in writing, I can maintain the same quality of output even beyond the 4th hour. The point of diminishing returns has moved outwards since I’m now a more seasoned writer and I’m becoming more and more connected with my inner muse.
Be aware of diminishing returns in your life

Are there any areas in your life where the law of diminishing returns is in action? Here are some examples:

* Career:
o Are the additional hours you are spending at work justified with the additional work you finish?
o Are you past the point where you can learn and grow in your current role? Is it time to request promotion/advancement?
o Have you lost the passion for your work? Is it time to pursue something else you enjoy more?
* Relationships:
o Are you trying to keep up with so many friends that you are losing balance in your other priorities?
o Are you spending so much of your time with your partner that it has become an act of habit which does not result in increased fulfillment?
* Daily life:
o Are you sleeping more than necessary to become well-rested?
o Are you watching TV/playing games/engaging in recreation beyond what you really enjoy?
o Are you spending more time on facebook/twitter/social networking sites/forums than is necessary?

Exercise your gut and become conscious of the diminishing point. This will be an extremely important skill to use as you optimize your days and maximize not just your productivity, but also your happiness level.

Really Unusually Uncertain By THOMAS L. FRIEDMAN

Really Unusually Uncertain
By THOMAS L. FRIEDMAN
August 17, 2010
The New York Times


Over the past few weeks I’ve had a chance to speak with senior economic policy makers in America and Germany and I think I’ve figured out where we are. It’s like this: things are getting better, except where they aren’t. The bailouts are working, except where they’re not. Things will slowly get better, unless they slowly get worse. We should know soon, unless we don’t.

It is no wonder that businesses are reluctant to hire with such “unusual uncertainty,” as Fed chief Ben Bernanke put it. One reason it is so unusual is that we are not just trying to recover from a financial crisis triggered by crazy mortgage lending. We’re also having to deal with three huge structural problems that built up over several decades and have reached a point of criticality at the same time.

And as Mohamed El-Erian, the C.E.O. of Pimco, has been repeating, “Structural problems need structural solutions.” There are no quick fixes. In America and Europe, we are going to need some big structural fixes to get back on a sustained growth path — changes that will require a level of political consensus and sacrifice that has been sorely lacking in most countries up to now.

The first big structural problem is America’s. We’ve just ended more than a decade of debt-fueled growth during which we borrowed money from China to give ourselves a tax cut and more entitlements but did nothing to curtail spending or make long-term investments in new growth engines. Now our government owes more than ever and has more future obligations than ever — like expanded Medicare prescription drug benefits, expanded health care, an expanded war in Afghanistan and expanded Social Security payments (because the baby boomers are about to retire) — and less real growth to pay for it all.

America will probably need some added stimulus to kick start employment, but any stimulus right now must be in growth-enabling investments that will yield more than their costs, or they just increase debt. That means investments in skill building and infrastructure plus tax incentives for starting new businesses and export promotion. To get a stimulus through Congress it must be paired with spending cuts and/or tax increases timed for when the economy improves.

Second, America’s solvency inflection point is coinciding with a technological one. Thanks to Internet diffusion, the rise of cloud computing, social networking and the shift from laptops and desktops to hand-held iPads and iPhones, technology is destroying older, less skilled jobs that paid a decent wage at a faster pace than ever while spinning off more new skilled jobs that pay a decent wage but require more education than ever.

There is only one way to deal with this challenge: more innovation to stimulate new industries and jobs that can pay workers $40 an hour, coupled with a huge initiative to train more Americans to win these jobs over their global competitors. There is no other way.

But the global economy needs a healthy Europe as well, and the third structural challenge we face is that the European Union, a huge market, is facing what the former U.S. ambassador to Germany, John Kornblum, calls its first “existential crisis.” For the first time, he noted, the E.U. “saw the possibility of collapse.” Germany has made clear that if the eurozone is to continue, it will be on the German work ethic not the Greek one. Will its euro-partners be able to raise their games? Uncertain.

Keeping up with Germany won’t be easy. A decade ago Germany was the “sick man of Europe.” No more. The Germans pulled together. Labor gave up wage hikes and allowed businesses to improve competitiveness and worker flexibility, while the government subsidized firms to keep skilled workers on the job in the downturn. Germany is now on the rise, but also not free of structural challenges. Its growth depends on exports to China and it is the biggest financier of Greece. Still, “Germany is no longer the country with the oldest students and youngest retirees,” said Kornblum.

By contrast, America’s two big parties still cling to their core religious beliefs as if nothing has changed. Republicans try to undermine the president at every turn and offer their nostrum of tax-cuts-will-solve-everything — without ever specifying what services they’ll give up to pay for them. Mr. Obama gave us expanded health care before expanding the economic pie to sustain it.

You still don’t sense our politicians are saying, “Wait a minute; stop everything; we have got to work together.” Don’t these people have 401k plans of their own and kids worried about jobs?

The president needs to take America’s labor, business and Congressional leadership up to Camp David and not come back without a grand bargain for taxes, trade promotion, energy, stimulus and budget cutting that offers the market some certainty that we are moving together — not just on a bailout but on an economic rebirth for the 21st century. “Fat chance,” you say. Well then, I say get ready for a long phase of stubborn unemployment and anemic growth.