Why is marginal thinking rational thinking?

Answer 1

"Rational thinking is marginal thinking" is an aphorism in economics that refers to prospective, or "forward" thinking in decision making. It helps to understand the concept of sunk costs and the fallacy involved in considering the past in making decisions in the present. A sunk cost is a resource already spent. It cannot be retrieved whether one spends more money toward the goal or not; therefore, it is rational not to consider sunk costs when deciding whether to spend more resources toward an objective. For example:

Bob buys an old truck for $500 and plans to fix it and sell it for a profit. The truck is worth $1200 fully restored. He believes he can put in another $500 for repairs, then sell the truck for $1200, netting him $200. Unfortunately the truck is in worse condition than Bob realized; he sinks $700 into the truck, and it's still not finished. He believes he can put another $500 into the truck and sell it for $1200. Does he continue to put money into the truck?

Answer: Yes (assuming there are no better opportunities, but that's another topic). The $1200 he already put into the truck does not matter. All that matters is how much he needs to put into the truck from now onward. He can sell the truck for $1200; he only needs to put $500 into the truck, leaving him with a marginal profit of $700.

Buying the truck will have been a bad idea, and the project as a whole will net a loss, but from the point in time in question, in regard to decision-making, it is rational to continue with the project.

That's why rational thinking is marginal thinking.

Answer 2

Marginal thinking is rational because it focuses on the additional benefits and costs of small changes, allowing individuals to make informed decisions that maximize their overall satisfaction. By considering the incremental impact of each decision, marginal thinking helps people allocate resources efficiently and avoid unnecessary waste.