Always Know When to Stop – Diminishing Returns Applies

There is a law in economics called diminishing returns (also called diminishing marginal returns). I believe diminishing returns also applies in many other areas of life. Understanding this law is important for your personal effectiveness.

Here is an explanation about diminishing returns from Wikipedia:

… in a production system with fixed and variable inputs (say factory size and labor), beyond some point, each additional unit of variable input yields less and less additional output.

The article gives an example:

Suppose that one kilogram (kg) of seed applied to a plot of land of a fixed size produces one ton of harvestable crop. You might expect that an additional kilogram of seed would produce an additional ton of output. However, if there are diminishing marginal returns, that additional kilogram will produce less than one additional ton of harvestable crop… For example, the second kilogram of seed may only produce a half ton of extra output. Diminishing marginal returns also implies that a third kilogram of seed will produce an additional crop that is even less than a half ton of additional output. Assume that it is one quarter of a ton.

The bottom line is that we get less and less additional output for each additional unit of input.

Believe it or not, similar idea also applies in many other situations in life. Take reading book for example. Your first hours of reading may give you the best return in term of the quality of ideas you get. However, after you get those most valuable ideas, the ideas you get from subsequent hours of reading will be less and less valuable. So the important thing is to know when to stop. Why should you continue doing something when it gives you less and less value?

The next question is: when should you stop? To answer this question we need another concept: opportunity cost.

Whatever you do always has opportunity cost. If you choose to spend your time for reading for example, you lose the opportunity to do other activities. The value you could get from those other activities is the opportunity cost: you do your current activity at the expense of the value you could get from those other activities.

So when should you stop? You should stop doing something when the additional value you get from that activity is less than the opportunity cost.

Back to the reading example above, if the value you get from reading the book becomes less than the value you could get from other activity – exercising, for example – then you should stop reading and do exercise instead.

To apply this principle, in whatever you do you should always be aware of the opportunity cost. When the opportunity cost is bigger than the value you get, you should stop doing what you currently do. Being aware of the opportunity cost is important; otherwise you will keep doing something while you can actually get more value if you do something else.

This principle can be applied to whatever you do: watching television, browsing, chatting, exercising, sleeping, and so on. Just know when to stop.

One comment

  1. […] whatever you do, diminishing returns applies. When you initially pay attention to something, the return is positive (provided that it is […]

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