Law Of Diminishing Returns: How It Works (Simplified)

Law Of Diminishing Returns: How It Works (Simplified)

The law of diminishing returns states that as you improve, you will need to put in more effort to advance further.

“I started working out last week, and I dropped 3 pounds already,” you tell your friends as you step away from the weighing scale. After another month goes by, you notice that you’re losing weight at a slower pace. Your weight loss has dropped to only a pound a week.

“I am working out just like I did before. Why am I not losing as much weight anymore?” you slam the wall after looking at the reading on the weighing machine. “Maybe working out yields only temporary results,” you tell yourself.

But what really happened? Why were you losing weight slowly despite sticking to the same exercise regimen and eating habits?

The rate of your weight loss reduced due to the law of diminishing returns.

Law of diminishing returns

What is the law of diminishing returns?

The law of diminishing returns states that results do not increase at the same rate of the effort put in. As your results get better, you need to put in more energy to improve results further.

A more formal definition of the law indicates, if you increase the input while holding all other factors constant, the corresponding returns will start slowing down. Though this is more of an economic concept, it applies to psychology too. It also goes by the name of diminishing returns phenomenon.

The concept was first introduced by early economists Johann Heinrich von Thünen, Jacques Turgot, Adam Smith, James Steuart, Thomas Robert Malthus, and David Ricardo.

Let’s go back to the example of losing weight. If you weigh 220lbs, shedding those first 20 pounds might take you a couple of months with a good routine. But the same method will not help you hit 180 pounds in the same duration. Moving from 200lbs to 180lbs takes more effort than dropping from 220lbs to 200lbs.

That doesn’t mean that sticking to the same routine will stop providing you results. They will, but the rate of the output will reduce over time and will need you to push harder or try new methods.

When you lose weight slower than you did before, cursing your workout is incorrect. Your muscles have grown stronger by losing 20 pounds, and they expect a harder challenge to improve further.

Related article: The 20 cognitive biases of the human brain

3 stages of law of diminishing returns

The diagram below shows the incorrect relationship between results and the effort.

Incorrect expectations of results

The time and energy you put in do not translate into a steady outcome, as shown above.

What actually happens is depicted in the diagram below. Results occur in 3 phases, namely, increasing return, diminishing return, and negative return. The initial effort translates to a steep increase in results. When you put in continued effort, the returns start to slow down. As you progress further, you will hit a point where putting in more effort no longer makes sense. In some cases, it can also lead to negative returns. Any further effort from that point, called the point of maximum yield, shows a dip in the result, as depicted in the graph below.

How results work

The upcoming examples will make the concept clear.

Example of the law of diminishing returns:

1. Adding headcount to increase pace

Oarsman

Let’s consider a hypothetical event where you’re the manager of a rowing team. You’re paid money for completing a distance as soon as possible. The faster you complete, the more money you earn. You can pick as many rowers you like to go from point A to point B.

When you have one person rowing, he clocks 40 minutes. Adding another person cuts the time by half(20 minutes), and your team takes 20 minutes. At this point, your returns are proportional. But, adding a third person throws the math off a bit. The trio takes 15 minutes, which is only a reduction of 5 minutes.

By now, your returns have started diminishing already. Introducing a fourth member decreases your returns further, where your team takes 12 minutes(3-minute improvement). Your speed is no longer increasing at the same rate at which you’re adding people.

If you keep adding people, you’ll eventually hit a point where it is a bad investment. Since you have to pay the oarsmen and you’re paid for the time you clock, you’ll lose money by adding more members. That’s the point of the maximum yield where adding additional people will incur losses.

Related article: How to work faster

2. Learning a new instrument or a skill

Piano player

When you decide to try your hand at the piano, you learn many skills in the first year. You grow from a person who had no clue about any keys to someone who can play many of the familiar songs. But, if you persist with your usual methods, you cannot play harder songs.

To broaden your array of musical expertise, you will need to learn more robust skills. Once you get there, you will have face a harder challenge to step it up. You will have to compose your own music which will require a whole different kind of practice.

The same applies to other musical instruments like the guitar, violin, or the drums. Sure, all of them have an initial learning curve to get started, but once you get the hang of it, you manage to play songs quickly.

You undergo a similar pattern while learning a new professional skill too. If you have never written code before, you go all guns blazing on the keyboard and create your first website in a few months. From that point, you will need to learn harder algorithms, better frameworks, newer technologies to hone your programming skills.

3. Growing a business

Growing a business

Let’s say you start an ice cream truck. You’re not only the owner but also the sole person handling all aspects of the business. You mix the milk and the flavor at night and sell the finished product during the day.

When you start making profits, you hire another employee who assists you with the preparation and selling. The extra hand helps you manufacture more ice creams and operate for longer hours. As a result, you cater to more customers and generate more profits.

But, you cannot keep adding people and increase your sales. After adding a few more employees, you will hit a roadblock. You may not have any more customers in the area. You’ll have to buy another truck to operate in a different location to acquire a new customer base.

The dangers of ignoring the law

Knowing the importance of law of diminishing returns is an essential aspect of self-improvement. Lack of awareness or choosing to ignore the law can lead to two possible negative outcomes:

1. Skills stagnating

Have you noticed some employees in an organization starting strong and then hitting a plateau? Such people follow a standard operational style and fail to scale up.

For example, as a new hire in a company, the expectations on the employee are quite low. The team expects him to play his part as a member of a larger project. Having a reasonable amount of self-discipline can help the person deliver excellent results.

As he gains experience, the team expects more from the employee. The same effort only leads to mediocre results because he is expected to take up more responsibilities this time. Over the years, he turns into a senior team member and might have to lead a project or a team.

People who put the same effort as a robot packing boxes remain left behind. Those who scale up and improve their skills keep growing in their career.

2. Giving up

When you begin learning a new skill or cultivating a good habit, you will find yourself brimming with energy to keep going. But, when your continued effort produces less significant results, your shoulders start drooping. You start questioning yourself and consider giving up altogether.

For example, when you only see a smaller reduction in weight, you feel like stopping your workout and eating all the junk in the world. But your body is going through a natural cycle. Going from a flat tummy to 6 pack abs requires a harder workout and a stringent diet than losing the first few layers of body fat.

Ignorance of the law can cause you to slip back into old habits and lose all the gains you made.

How to use the law of diminishing returns to your advantage?

Here is two ways of application of law of diminishing returns in real life for growth.

1. Consider complementary results

As you improve your skills, your direct result starts diminishing. For example, when you learn the guitar, you will learn less in the second year than in the first year. But that does not mean your effort is worthless.

Sure, you will need newer techniques and stricter practice to improve your performance by 10% as you scale up. But, if you consider only your guitar skills, you’re missing the big picture. The increased performance, even when small, opens up a lot more avenues.

From your first year of guitar adventures, you will manage to impress some ladies, but you’re not enough to perform on stage. At the end of the second year, those few extra chords you’ve learned make you proficient enough to strum in front of a hundred people. With some more improvements, you turn into a Youtube sensation. Eventually, you can start a guitar training institute for professionals and even write a book that turns into the next bestseller.

So if you look at your growth path again, your guitar playing skills improved marginally over the years. But those additions made a significant difference to your income as shown below. When you were a beginner guitarist, your friends would never pay you for putting up a performance at home. The most that could buy you is a couple of beers and dinner for the weekend. But those small improvements in the years after can fetch you millions of dollars.

Growth potential

Growing your skills as you improve is definitely harder, but the outcome is well worth it. Just like the air gets thinner at the top, the number of skilled professionals at the top level reduces too.

Related article: How to improve little by little

That said, you cannot solely aim to increase your playing speed to a point where it becomes less enjoyable, as shown in the example below. That’s the point of negative returns because you need dedicated practice to reach such speed without any significant benefit. You might gain some Youtube followers and comments, but you will fail to gather a crowd eager to listen to such a pace.

2. Try new methods

Trying new methods

The definition of insanity is doing the same thing over and over again, but expecting different results.

Albert Einstein

When you begin learning a new skill, you can pick up quickly on your own. You can find a book to read, enroll in a course, or sign up for classes from a teacher. But, to scale up, you need to step out of your comfort zone. Sticking to the same style and techniques and hoping for mastery is like expecting to become a chess grandmaster by playing against a computer bot.

Practicing against a machine can help you beat your friends and family, but if you intend to beat the pros, you have to up your game. You need to understand the mechanics of the game, learn different formations, and apply computational models.

The world has the wrong notion that practice makes perfect. In reality, practice only creates a routine. If you practice thousands of hours the wrong way, you will only end up with an unhealthy habit. You’ll find such examples in sports where young sportsperson with the improper technique find it impossible to compete at a higher level.

What builds expertise is not just practice, but the right practice. You have to challenge yourself to try unique methods, experiment with techniques that make you break a sweat and explore new information that stimulates your brain cells.

The same logic applies to different areas of expertise.

  • Writing: Typing thousands of words every day won’t make you a Stephen King. You will have to learn and practice different techniques of writing.
  • Professional skills: Trying the same methods to make a sale will only yield mediocre results. The top sales professionals have learned from the experts and invented their own approaches to increase conversions.
  • Entrepreneurship: Typing your resignation letter, setting up a business, and putting in long hours won’t lead to a million-dollar business. You will have to experiment, learn from your mistakes, and find the winning formula.

Conclusion

Any skill takes time to develop. The further you go, the harder it becomes to step it up. That isn’t a reason to give up. If anything, it should serve as a motivation to try harder. The path to becoming the best of the best is trodden with thorns. If it was decorated with a red carpet, all the average Joe’s would have rolled over and made it.

The whole reason why the cream of the crop holds a special demand is because it’s rare. You can take the standard route and remain one among the mediocre or put in relentlessly painstaking effort to become outstanding. The choice is yours.

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