Marginal Impact

Updated: Oct 25

Summary


The marginal impact of an investment of time or money is the additional impact that this specific investment created. The term is usually used to emphasize that when you make decisions, you should take into account only the impact that was actually generated by your choice, rather than counting the impact of already existing efforts. For example, joining a huge movement with lots of impact isn’t inherently better than joining a small movement, if your own impact isn’t greater as a part of that movement.


Overview


People love joining large important movements - what’s more exciting than being part of something that changed the world? But if you’re wondering how you can do the most good, relying on how impactful a project is as a whole may be deeply flawed.


The marginal impact of your efforts (whether you’re investing time, money or something else) is the additional incremental impact they achieve. It originates from the idea of marginal returns in Economics: If you’re a toaster manufacturer considering whether to manufacture one more toaster to sell, for example, the question you need to ask yourself is not whether the toaster business is profitable over all - but rather how much profit you’ll make on this next toaster. It may be the case that selling toasters is a lucrative business overall, but the market is already flooded with your previously-sold products and you’ll fail to sell another one. In this case, your total returns from selling toasters might remain large even if you manufacture another one, but your marginal returns (income minus expenses of this next unit) will be negative - so manufacturing it in the first place is a bad idea; you’re losing money.


Similar logic applies when we’re trying to achieve other types of impact beyond making more money - including helping others. What we should examine whenever deciding to spend our time, money, connections or opportunities on something is how much impact that additional effort will have. If we don’t, we risk making a mistake that mirrors the sunk cost fallacy - putting bad money after good.


But does this nuance truly matter in real life? If I want to donate to charity, for example, wouldn’t its current impact be a good proxy for how impactful future donations would be? Not necessarily.


Every year, millions of people choose to donate to Wikipedia. This makes a lot of sense - Wikipedia serves more than a billion people every month, providing access to educational materials, answering practical questions, and fighting misinformation. At the same time, keeping their technical infrastructure alive and well costs around $36 million a year. This means that Wikipedia provides this value at a cost of less than one cent a month per individual - what could be a better impact-focused donation? However, while Wikipedia needs about $36 million a year to keep the lights on, in recent years they’ve been raising well over $100 million every year. More importantly, most of those extra revenues are invested in efforts that have high costs and unclear results, according to a previous executive director. As a result, it’s unclear that additional donations to Wikimedia lead to improvement in the content provided by Wikipedia. This is an example where the total impact (or even total cost-effectiveness) is a pretty terrible proxy for the marginal impact of additional donations. The first few millions of dollars that Wikipedia receives are incredibly valuable and important, but those are already a done deal - you can only control the marginal impact of the 100 millionth dollar or above.


These kinds of effects are not unique to Wikipedia. Most organizations experience diminishing returns (or to be more accurate - diminishing marginal returns). That’s when the first dollars spent are worth much more than additional investments. But marginal returns can also be higher than average returns, for example if an organization has significant fixed costs or economies of scale. The bottom line is simply that to choose our next actions, we need to look at the marginal impact of our efforts instead of the total or average impact of the organization - whether they’re higher or lower.


This consideration is as important when making career decisions as it is when deciding where to donate. The marginal impact of a new employee in an organization can be completely different from the average impact of an employee in the company. Your marginal impact in an organization depends on a lot of specific details, but there are some general trends to how the idea of marginal impact might influence your career decisions:


  • While at first glance it might seem obvious that joining more successful and impactful organizations is always better, some of the additional promise of working at a great organization is mitigated by having less influence on the organization as a whole, thus making it unclear what your marginal impact is.

  • We still think joining incredibly successful and impactful organizations is usually a good idea, but this is because they often provide good opportunities for individual impact (as well as great career capital) - and their total impact shouldn’t sway you if they don’t.

  • This also greatly increases the importance of personal fit and acting on unique opportunities you see that others might miss. While obvious opportunities that everyone appreciates usually have larger total impact, opportunities that you can uniquely capitalize on often offer great marginal impact.


In conclusion, marginal impact is an important concept that can help us avoid the pitfalls of simpler heuristics for where we want to invest our time, money or even careers. Thinking about the marginal impact of our actions can help us both steer clear from cases where past investments were promising but are no longer that useful, as well as identify extremely promising opportunities that might be missed if we were to compare total past impact.


Additional Resources

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