One of the most prescient concepts in economics is the notion that “all changes occur at the margins”.  Expressed another way, this means that when things change, it happens in small incremental movements.  One of the commonly cited axioms of economics is that “rational people think at the margin”.  What this means is that our decisions should be framed in the context of what impacts our next action or decision, and ignore costs that are sunk or decisions that have already been made.

The importance of this concept comes into play when making both personal and financial decisions.  When deciding whether to fix an old car that has broken down, the only factors relevant to the decision should be the facts at hand.  It does not matter how much money you have already spent to fix the car . . . it only matters what you do with the current situation.  (Note that from a financial perspective, it is optimal to repair your existing automobile unless the cost of repairs exceeds the value of your car in reasonable working order.  The decision to get rid of your old car and buy a new one is almost never financial optimal.  This doesn’t mean that you should never get a new car, only that the purchase is a ‘lifestyle’ decision and not a ‘financial’ one.)

The inevitable result of thinking ‘at the margin’ is a narrowing of focus onto the decisions and opportunities at hand instead of dwelling on mistakes and missed opportunities of the past or fantasizing about expected opportunities in the future.  The only time that anybody ever has to act is now.  The past is gone, and the future has not yet come.  Action must always occur in the present tense.  This is not a renouncement of the benefits that come from planning for the future, but a realization that the future is built on many successive decisions, and that each decision we make builds the road for future decisions.

By zeroing-in on the decisions that you can influence today, it will create a remarkable degree of emotional freedom.  This liberation will come when you are no longer shackled by old decisions and no longer nervous about what will come in the future.  The future is and has always been uncertain.  However, people who have grown accustomed to making rational decisions develop the confidence that they can adapt to whatever future situations unfold.  The most important thing is to use the information and resources at hand to make the best decisions possible.  This crystallizes a seemingly infinite number of possible future options into one decision . . . your next one.  The result of that decision will set the stage for future decisions, but so will external events that are beyond your control.

The single area where most people run into trouble is that they under-estimate the extent to which their future will be shaped by things that they do not control.  Thinking about the unknown is inherently frightening, because we cannot plan for something we do not know will happen.  However, the unknown should not be allowed to become a crutch that scares us into inaction, but should also be appropriately heeded so that actions are not taken that greatly depend on a specific future outcome that is far from guaranteed.

The extent to which we can control our lives always is, always has been, and always will be at the margins.  We can influence small iterative changes that compound over time to produce tremendous results.  On balance, it is best if our actions create outcomes that are robust or adaptable to future changes in the marketplace.  While we may not know what these changes will be, we can be confident in our ability to adapt to them.  By shifting our focus to present things that happen ‘at the margin’ it will allow us to enhance our circle of influence by improving the effectiveness of our decision making.