Why Economics Produces So Many Billionaires

So an economics degree is the most popular college degree among billionaires and yet most people with this kind of degree don't make that much money. So in the next few minutes I'm going to explain why this happens and at a deeper level why an economics degree is valuable in some cases and what that means for you. So the simple reason is that government and academia pays poorly and if you are a professional economist, right, you do research, then you're probably going to go either into teaching or into government work. And that is the far less interesting end of the spectrum. The far more interesting end of the spectrum is why so many uber wealthy individuals have a degree in economics and how it helps them. Because those lessons again can directly apply to you and me. 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You've recently heard about the Facebook hires maybe where these AI researchers who are really deep in theory are getting paid hundreds of millions of dollars, like an MBA all-star. And that's because the theory very directly translates to the practice when you're talking about these massive firms like Meta and Google and OpenAI. And economics isn't at all like that. Instead, the theory of economics, if you go really deep into it, is pretty much useless. But when you apply the theory, the high-level theory, the lessons, the strategy of economics to a dynamical system, so to a system that evolves over time, like a business, like your personal life, like any quote-unquote market, whether that's a grocery store you start or a SaaS business you start or the equities market and national market that you live in, then it's incredibly valuable. But why exactly is it that valuable? So first and the most obvious is just economics conveys an understanding of how money works and flows. That's the easy answer as well. I think there are two core concepts that are more applicable to you and me. The first is that, like most STEM fields, but especially when you think about money and finance and business, economics teaches you to think through the second, third, and fourth order and order effects of any single decision. So just like a computer scientist may understand that if they change this line of code, it's going to affect this and this and this and this and this, when you talk about money, economics helps you understand when x happens, y happens, z happens, and so on down this chain of things that happen. And that is a very powerful tool when you talk about something like capital accumulation and business. And that's something we can all improve on on a daily basis when it comes to decision making. Just think through decisions. And money is such an inherently emotional thing, but the study of money, that of economics, and the study of exchanging value is so useful in that it separates the emotion from it and lets you think through those capital effects, those effects from your decisions that involve a business or value or money or goods, and critically understand the risk and reward dynamic. And pricing risk is so hard, right? I can give you a very basic example of that. If you drive to an airport and get on a plane, right, how many people in that situation are more scared of going on the plane than driving to the airport? Nearly everyone, right? The ratio of people who are scared about driving to the airport for their personal safety versus scared about getting on the plane is like 100 to 1. But the actual odds of death or serious injury from driving to the airport is several hundred times the odds, and quote me on that, I'm sure it's high, the risk of going and flying on the plane. So humans are very bad at pricing risk, and yet capital accumulation is all about risk because risk correlates with reward. And so the people who get the most reward took some volume of risk, and they at some point were probably really good at pricing risk. There are exceptions, of course, but if you look at the majority of the uber wealthy that created that wealth, they were very good at managing risk, and that is that lesson that economics teaches you of separating emotion, thinking through decisions, and pricing risk correctly. And hedging risk, I think, is one core aspect there. Now second economics, and especially econometrics, which is a subfield of economics, focuses on systemization and data. It's all about looking through data and then thinking through those effects, but you need to understand the data to do that, and you need to have a system or a model for understanding things. Economics is a field built on models, which is a system of equations that you can plug things into to predict the future, or just predict something that's going to happen when you plug those variables into it. And if you translate that into a business setting, now you're talking about looking through metrics, you're talking about modeling and trying to predict the future, or just make better decisions. And you do that in other fields, but when you talk about capital accumulation, or making money, it makes sense that the people, or some of the people who make the most money, were then trained in the field of using data and systems to predict the flows in the movement of money and value and goods. Now my final, and a final little practical thought, is just a lot of financial things can seem really intimidating and scary, like investing in stocks. Which one do I buy? And money market funds, and credit yields, and mortgages, and all these financial instruments that could be really bad for you and lose you a lot of money. And the study of economics gives you an understanding of all of those things, which is just practically useful in a lot of ways. Anyway, that is my little spiel for today on economics, both the good side of it and the bad side. So like theory being incredibly impractical. So I will see you in the next one.