Law of Diminishing Returns
Have you heard of the law of diminishing returns? It’s a concept that I learned while studying Economics in junior college. I find the lessons very applicable in personal growth.
Let’s say you have a maize field. You want to increase your yield using fertilizers. To achieve maximum return, you need to understand 3 principles:
- Not every unit of input will lead to a proportional increase of output. This depends on the utility level of each added unit of input. For example, adding fertilizers to a maize field with no fertilizers would initially lead to a jump in yield. When there’s already a fair amount of fertilizers used though, adding more would probably not give the same effect.
- At one point, adding more input gives you a decreasing rate of return. For example, perhaps adding a 10th pack of fertilizer gives a 1kg increase in yield. But adding your 11th pack only gives 0.5kg increase, while adding your 12th pack gives an even lesser yield increase of 0.3kg. Subsequent packs bring you even lesser returns.
This is the law of diminishing returns at work. The law states that in all productive processes, adding one additional factor of production, while holding all others constant, will at some point yield lower incremental per-unit returns. The 10th pack is the point of diminishing returns.
- If you continue adding more input despite diminishing returns, you will reach a stage where not only do you not get a positive return for every extra input, but you decrease your overall output! For example, perhaps after adding your 13th pack of fertilizer, you get a yield decrease of 0.3kg, due to overfertilization of the soil which damages your crops. This is known as negative returns.
For your easy understanding, I’ve created a graph to illustrate the concept:
* Here, input = number of packs of fertilizer while output = total maize yield. The point of diminishing returns, in this example, is 10 packs of fertilizer. The point of maximum yield is 12 packs of fertilizer, which is where you get the most maize yield. Beyond that, you get lesser yield due to negative returns caused by over-fertilization of soil.
This same pattern can be seen in other productive processes. Say you run a restaurant but you only have one chef. You hire more chefs, which results in more meals prepared… initially. Eventually, you reach a point where the increase in total meals prepared per new chef decreases, even though the new chefs are as skilled as your current ones. Meaning…
- 1 chef → 50 meals a day
- 2 chefs → 100 meals a day (total). This is a marginal increase of 50 meals (100-50) after hiring a 2nd chef.
- 3 chefs → 150 meals a day (total). This is a marginal increase of 50 meals (150-100) after hiring a 3rd chef.
- 4 chefs → 180 meals a day (total). This is a marginal increase of 30 meals (180-150) after hiring a 4th chef. As it’s lesser than your previous marginal increase, you’ve hit diminishing returns!
* Assume unlimited orders coming in
Why does this happen? One possible reason is that by having so many chefs in a fixed kitchen space, you create problems originally not there. For example, chefs getting in each other’s way while cooking, chefs having to compete for use of kitchen tools (pots and pans), and so on.
Continuing to hire new chefs, despite diminishing returns, will eventually lead you to negative returns:
- 5 chefs → 200 meals a day (total). This is a marginal increase of 20 meals (200-180) after hiring a 5th chef
- 6 chefs → 180 meals a day (total). This is a marginal decrease of 20 meals (180-200) after hiring a 6th chef, despite paying more money to hire a 6th person!!
The negative returns is because the earlier problems causing diminishing returns are now aggravated. Firstly, there are not enough stoves for every chef to do their cooking. Secondly, the chefs, having even less space and resources per person, become frustrated and get into arguments, which prevents them from getting work done. Thirdly, some chefs may be slower in their meal preparation due to the lack of space and negative work climate.
By hiring so many chefs to the point of negative returns, you have negatively affected the productivity dynamics of the system, hence leading to a decreasing output. Or as they say, “too many cooks spoil the broth”! 🙂
Law of Diminishing Returns in Our Life
So how does this apply to personal growth? If you observe closely, you can see the law of diminishing returns at work in many areas of your life:
- Work: After working on something to a highly optimized state, you get diminishing gains from working on it further. Spend even more time and you get negative returns — where over-tweaking decreases vs. improves the quality the output.
- Learning curve: Your first 1–2 years at a company are typically when you learn the most. After that, your learning begins to decrease, to a point where it plateaus as you constantly face the same few situations and deal with the same problems. That is unless you have a dynamic job that’s constantly changing and putting you in new circumstances, tasks.
- Food: Your first bite of an ice cream may taste nice. Subsequent bites may taste nicer. However, after eating a certain amount (and this is heavily dependent on taste preferences), the ice cream doesn’t taste as “nice” anymore. Continue eating regardless and soon you feel repulsed by it!
- Sleep: Sleeping 6 hours makes you feel good. Sleeping 8 hours may make you feel better. But when you sleep 10, 12, 14 hours, you don’t feel better — you just feel sluggish. Some of you may even get a hangover from over-sleeping.
- Recreation: Playing a game, watching a show, or using Facebook is relieving, especially if you need a break. But do it for 2, 3, 4 consecutive hours… the utility value decreases. Soon, you get negative utility, where you feel drained from doing the same activity for so long!
- … and many more!
I frequently see diminishing returns at work in my life.
For example, when writing articles, I get the best return in the first couple of hours, though it also depends on the kind of article I’m writing. This is due to partly due to mental weary from writing non-stop while having to consider countless different perspectives of different audience groups. After the first 2 hours, I find it much harder to write while maintaining a high consciousness. After the 3rd to 4th hour, I start making micro-amendments and adding off-tangent points that worsen my article (ergo, negative returns). As opposed to writing non-stop for 4 hours and only going for a break when I start doing the type-delete-type-delete routine, I find that it’s much better for me to take a quick break or switch to a different task at the 2nd hour, before returning to writing later on. I find that doing so is a more productive use of my time.
Or podcast editing. Editing a podcast can be as simple as just adding the intro and outro music. If you wish to make it better, you can spend a couple hours to edit and improve the flow. Yet, you can go crazy with editing where you remove every um, ah, pause, and deviation to perfect each sound byte. Take this to the extreme, and you get a podcast where the host sounds like an AI reading a script. Again, an example of negative returns.
3 Implications of Law of Diminishing Returns
Understanding the concept of diminishing returns is extremely useful.
- Firstly, it optimizes resources. By knowing when diminishing returns happen, you know the optimal point to stop so as to get the best returns for your time/resources. E.g.,
- Stopping work when you feel you’re getting diminishing returns
- Limiting your time spent on TV, games to the point where you feel adequately rested
- Controlling your food portion so that you eat just enough to be satisfied (vs. eating to the point where you feel bloated and regretful for over-eating)
- Not hiring additional staff when you get diminishing returns for each new headcount
- Moving on to a new job when you’re no longer learning as much in your current job
- That said, there are instances when you should continue on despite diminishing returns. This is when (a) the benefits of achieving maximum output outweighs the high costs of getting there (such as the benefits of being the market leader vs. follower), OR (b) the value of the marginal increase in output outweighs the cost of the marginal input to get there. For example, even though it takes a lot of work for me to create a high quality article, I still choose to do so. That’s because the return, which is the benefit of each reader x 10,000s of people who would be reading this article far outweighs the costs of doing so.
- You should ALWAYS stop once you reach negative returns though, because that’s when investing more time/resources gives you a negative output.
How do you know when diminishing (or negative) returns kick in? The best way is to measure. If you want to track the effectiveness of your traffic building techniques, install a traffic counter that tracks referrals. If you wish to know how effective your newsletter opt-in strategies are, install a plugin that tracks conversions. You know you’ve hit diminishing returns when each additional input becomes less effective in increasing your output.
For example, let’s say you want to grow your blog traffic through guest posts. You decide to guest post on site X. While your 1st, 2nd, and 3rd guest posts generate 300–400 new visitors each, your 4th guest post only generates 100 new visitors. Assuming all things constant (such as your topic choice, the traffic of site X), your 4th post has led to diminishing gains. If your 5th post at site X generates similar to lower results vs. your 4th post, it’s probably time to pick a different site to guest post.
Yet, it gets tricky when the output is not measurable. For example, it’s tough to know when to stop when it comes to creative work like video editing. How do you know what is “good enough”? Perhaps you feel that adding little special effects will not make a big difference, but maybe they will make a big impact for your audience. And vice versa. Maybe you have a much higher standard than the regular Joe, and this standard is created with good measure. Maybe it’s precisely because of your high standard that you can be so successful in work.
My advice is to (1) learn from experience and (2) use your gut. How to train your gut:
- Look at what the best folks are doing for idea, references. Sometimes we may have a very precise vision in our mind, but this could be just a neurotic target that makes little difference to people. Neurotic perfectionists are guilty of this.
- What is the marginal benefit you can achieve from this additional investment of time, effort? For example, what change can you make from spending an additional hour on this task?
- Is this marginal benefit worth the marginal cost (the extra time, effort) of achieving it? Every action has an opportunity cost — considering all the other things you can do with this time, effort, is it worthwhile to strive for the marginal benefit or use that for other projects?
With editing for my podcast, I shared in my perfectionism series that I can go crazy in my editing and edit the heck out of every frame of my audio clips. But after I reviewed other top-rated podcasts (best in class folks), I realized these folks did not even bother to edit out their ums and ahs, which incidentally didn’t affect my usage as a listener. When I thought about it, I realized such ums, ahs, and at-times tangential comments are just normal speech patterns that don’t negatively affect the quality of an episode, as long as not in excess.
By checking via the 3 questions above, it helps you take a step back and evaluate the benefits that can be gained vs. the costs required to achieve these benefits. This is especially important for perfectionists, who have a habit of taking things to the extreme and trying to max out every variable, every condition, when the truth is that there are some tasks where such optimizations don’t make a big impact, and it’s better to channel this effort elsewhere.
Lest you feel that the law of diminishing returns reminds you of the 80/20 rule, they are related! The 80/20 rule states that 80% of results are usually caused by 20% of key factors. Usually, the effort required to achieve the final 20% of results, such that a piece of work becomes “perfect,” takes an astonishing amount (80%) of effort. This is when diminishing returns kick in, and this is when you need to decide if the state of perfection is worth this huge amount of incremental effort, or if you should move on and focus on more important projects.
Watch Out for Diminishing Returns in Your Life
Are there any areas in your life where the law of diminishing returns is in action? Some examples:
- Are the additional hours you are spending at work justified by the extra work you complete?
- Are the additional hours you’re spending on a task justified by its quality improvement in output?
- Have you reached diminishing returns in what you can gain in your current job? Is it time to request for an advancement, or if not, to explore other career options?
- Are you trying to keep up with so many friends, contacts that you’ve compromised on your life?
- Are you spending so much time with a person (a best friend; your partner) that it’s leading to diminishing gains for both of you? (For example, neglected life priorities? neglecting other relationships?)
- Daily life:
- Are you sleeping more than necessary to become well-rested?
- Are you engaging in recreation, watching TV, or playing games past the point of adequate enjoyment?
- Are you spending more time on Facebook/social media than necessary?
Exercise your gut and become conscious of the law of diminishing returns. This will be extremely useful as you optimize not just your productivity, but also your fulfillment in life.
This is part of the Maximizing Productivity series.
- Become the Master of Your Time
- Put First Things First
- Achieve More With Less In Life Using 80/20 Principle (3-part series)
- Get Your Big Rocks In First
- Law of Diminishing Returns
- Boost Your Productivity in 50 Ways