The concept of diminishing returns in economics refers to a decrease in production output as you increase a single factor of the production process, keeping all other factors equal. For every new amount of effort put in, you get back increasingly less results. This concept is related to the Pareto principle, where you get 80% of the output for the first 20% of effort, after which each percentage of output takes more and more percentage of effort.
We can borrow this law from economics and apply it to our personal lives. We would like to live economically regarding our time and resources, and for this the law of diminishing returns is a valuable tool. There are many aspects of life which you can view through the lens of diminishing returns.
When your closet is almost empty, you have no choice and variety in what you wear. As you add clothes to your collection, you will be happier through your choice and variety in clothing. As you keep adding clothes, the benefit of a new piece of clothing reduces. What is the 45th piece of clothing worth when you already have 44 to choose from? You might even say that choosing between a great number of items will even lower your overall happiness from choice stress.
A bigger home will make life easier for you, as you have more room to manoeuvre, create dedicated rooms for hobbies, have separate rooms for personal privacy and store belongings. Upping the total square metres only makes you happier for so long, as what is the value of an additional bedroom? You might have guests over, you say, so one additional bedroom is valuable to you. Then what is the worth of a second additional bedroom? Having more space will have reduced value as you keep adding more of it. At a certain point the cost of having more space (higher mortgage, cleaning, heating) will be more than the value it brings to you.
Technology promises to make our lives easier and it historically certainly has done so. We produce more with less resources or automate tasks to save time. It makes sense to use your phone for navigation, addressing last minute changes in your appointments, reading during your commute or for a guided sports programme to make use of the convenience it offers. The downside is the ease with which you keep on adding uses of your phone without much deliberate thought on the value of that use. Not all that is possible with technology is valuable to you and you should be strict with which tools you allow in your life and which you acknowledge but discard.
Even income has diminishing returns to happiness. It turns out that people get happier quickly only up to a certain amount of income, after which every additional euro makes them happier increasingly less. Your income itself has diminishing returns in a progressive tax system. All of your salary in the lower tax bracket is taxed with a lower percentage, thus leaving you with more net money. As the portions of your salary move up into the higher tax brackets, they will leave you with less and less net money. You might ask yourself up until which point it is useful to increase your salary by working more, or using those hours to other purposes1.
- For example, after a certain point, it might make more financial sense to spend time with your child instead of sending it to paid childcare. Apart from being the financially superior choice, it might bring you other benefits such as bonding with your child too. ↩︎