Ignorance premium and the idiot index

When you want to do something and don’t know how to get it done, you’re going to have to pay whoever can do it for you. Let’s call it the ignorance premium.

For example, if you want to eat a specific dish and you don’t know how to cook it, you will have to order it at a restaurant. Depending on where you live, whatever it costs you to cook the dish—ingredients, equipment, and time—will likely be cheaper than what the restaurant charges you. You’re paying more because you don’t know how to cook the dish. Here’s how you calculate your ignorance premium:

A note for the sticklers: To keep it simple, let’s imagine both take one hour for you to do. (e.g., It takes an hour for you to find a restaurant, commute, wait for the dish, etc. and it takes you an hour to cook it (not including the time it took you to do groceries). Let’s also assume you own the equipment—stove, saucepan, etc.—already, so you’re not paying extra for it.

Cost of restaurant dinner – cost of ingredients = Ignorance premium

That’s a simple example. We all pay the ignorance premium, all the time. If a driver knew how to fix their car, they wouldn’t be paying an ignorance premium to a mechanic. The more sophisticated and unique the car, the higher the ignorance premium goes. If only one person in your city knows how to fix your car, they can pretty much bill whatever they want—and you will consider paying for it.

Here’s the takeaway: the better you understand a problem and solution, the lower your ignorance premium will be. You shrink the ignorance premium by gaining understanding. You gain the most understanding by doing, managing someone who is doing, and talking to other people. Mr. Beast will hire consultants who bring past experience; he likens them to cheat codes.

For example, if you can do it yourself—cook the meal, fix the car, etc.—you will pay almost no ignorance premium. Some problems are more complicated than others though! Let’s say you understand in theory how to fix the car, but you have a lot of trouble acquiring the parts you need—a supplier will be charging you the ignorance premium. (When you’re paying the ignorance premium, you would be well served asking questions and learning how to think—so that you have greater control over the premium next time.)

Companies often pay the ignorance premium to service providers. If a company needs to hire a PR firm before and has no in-house marketing expertise (or little publicity experience), then this company will likely pay an ignorance premium. However, if the company has an in-house publicist who has run their own PR firm before, and brings their own rolodex of journalists and is willing to offer their network, then that company has much less of a need for a full service PR firm. Maybe they may hire one for media relations, to expand their network of relationships and advise on messaging, but that’ll be much less expensive than hiring a PR firm for every publicity need. (Not only this—companies also pay a certainty premium too—the premium for greater certainty and confidence, and less risk.)

Ignorance premiums are everywhere. When you don’t know who your audience is or haven’t built a direct channel of communication with them, you pay a steep ignorance premium to communicate with them—through paid ads, publicity, or other forms of promotion. Ryan Leslie noticed this inefficiency and decided to build Superphone as a way for celebrities to reach fans through text messages, and for businesses to communicate directly with their customers.

When Elon Musk wanted to build rockets, he was infuriated by the cost of the finished products compared to the cost of basic materials. Because rockets were so hard to build, every supplier and manufacturer in the middle of the process was charging an ignorance premium—which meant the end customer, which used to only be the government, now it was Elon—would pay an absurd accumulated ignorance premium. 

Elon called this the “idiot index”—if a product had a high idiot index, its cost could be reduced significantly by devising more efficient manufacturing techniques. The idiot index looks more like a ratio; as Walter Isaacson writes, “Something with a high idiot index—say, a component that cost $1,000 when the aluminum that composed it cost only $100—was likely to have a design that was too complex or a manufacturing process that was too inefficient. As Musk put it, ‘If the ratio is high, you’re an idiot.’” (The ignorance premium was $900.)

If the idiot index on a product or service is high, and you’re highly motivated to lower the ignorance premium that you’re paying on it, the way to shrink both is to learn how it works and how you can do it yourself. (Sometimes, for difficult things, you can really only learn by doing it yourself.)

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