Compared to What?

Comparative advantage.

This mental model comes up often in the MBM world, and I think it's doubly difficult; difficult to wrap your head around (especially if you're like me, a nerd of the English lit variety as opposed to the economics department sort) and difficult to apply day to day.

If you check out the "Science of Human Action" chart in the middle of The Science of Success (pg. 48-49), you'll notice that here--where MBM is boiled down to it's basics--"comparative advantage" comes up not once but THREE times, and it's represented in all levels of the chart: societal, organizational and individual. 

How do we apply this mental model?  First, some basics and to clarify terms. 

• Absolute Advantage: Most people--myself included--at one point or another fall into the trap of thinking that "what I'm best at" is my comparative advantage.  That's not necessarily the case: what we're really talking about is a person's absolute advantage.  If you are the very best at yodeling or typing or problem solving, you have an absolute advantage in those areas. 
• Comparative Advantage: Being really good at something, though, is not the same as having a comparative advantage.  As Ann said in a post earlier this week, said, "The thing about comparative advantage is that there needs to be a comparison. What are you being compared to?"  So, there's the first part: you have to compare your ability in one area to another persons'.  The second part deals with opportunity costs--you only have a C.A. if you have the lowest opportunity cost.  Put another way, you want to ask "Who gives up the least by doing X?" 

So, how do we use this concept?  Asking a simple question can help: "Do I, compared to everyone else available, have the least to give up if I do this task (even if we all know Joe is better at it than me)?"  If the answer is yes, you have the comparative advantage.

Example: Here's a real-life example (the gist of the story is true, but I've made up the dialogue since I wasn't actually there ;-).  An economics professor on sabbatical came to work with a Koch company.  He brings a stack of papers with him as he approaches his administrative assistant, asking, "Excuse me, where's the copier--I need to make some copies." She told him, "Give those to me, I'll do it."  Not wanting to trouble her, he said, "It's no bother, I can do it."  She responded, "I know you can do it, but I should do it because I have the comparative advantage; during the time it takes you to make the copies, you could be be doing more valuable things with your time than I would be--you have more to give up."  So, he gives her the copies, thinks inwardly that he has a lot to learn about this comparative advantage stuff, and goes about his business.  The next day, he approaches the assistance's desk, hands her a stack of papers to copy with a smile, and turns around to go to work.  But she calls out to him, "The copier is around the corner.  You'll have to do this yourself."  "Wait," he said, "I thought you have the 'comparative advantage'?"  The assistant, as it happened, had expertise helping business groups do contracts, and on that particular day the other group's regular assistant was out, and a deadline was pending on a deal worth over $40,000.  Busy, she paused to explain: "Yesterday I did, but today's a new day.  Today, I'm helping the team down the hall.  If I don't help, they won't get done and we'll lose the contract.  If you get paid more than $40,000 an hour, I'll help you make copies...."  [ht to Tony W for sharing the story.]

The tricky thing with comparative advantage is that it requires us to constantly re-assess situations, to constantly examine opportunity costs.  Yes, you probably have the same absolute advantage today that you will tomorrow, but you may not always have the same comparative advantage month-to-month, day-to-day, or even hour-to-hour.

Comments

[Kurt]

Great Example!

[Andy Gillette]

Thanks Kurt!