Friday, January 3, 2014

The true economics of life

I love business. Back in college, I loved taking business classes with only two exceptions--business law (BORRRR-ING) and the application of human resources (like firing people). Other than that, I was so jazzed about all of my classes. I found it all so fascinating and intuitive. Make revenue, account for expenses, count the cash. If you're negative at the end, play with the variables to see how you can increase revenue and/or decrease expenses. For instance, conduct a marketing campaign and see how that it affects the numbers or hire a new CFO.

I truly enjoy it.

Alas, I know business isn't necessarily the noblest of professions, so I don't work in business directly right now. (And I'm too lazy to commute to Seattle, let's be honest.)

One premise that I remember from all of my economics classes is that people are rational decision-makers. They will analyze the price and utility of a good, and then they will come to a rational decision about whether to buy it.

I contend that people are not rational, myself included. There are so many irrational decision-makers in the world that make cost-benefit decisions based on emotion. I don't even know how the premise of economics can be true. Back then I accepted the premise to be true because I was the type to take whatever a professor said as fact. And then I keep observing real life, and it does not operate like those pretty graphs I made in economics.

I liked those pretty graphs that made sense. When reality can't be so graphed so easily, it befuddles me.


Jesse said...

The way I think of it is that we made these simplifying assumptions (like rationality) because without them, it would be impossible to know anything. This way, we can figure out the pretty graphs, etc., and then think about how the reality might differ from the graph (for example, some type of irrationality might cause this demand curve to be steeper than we'd otherwise expect). So I still think the overall field is useful, as long as you remember to adjust for the incorrectness of the assumptions. When I encounter people who I disagree with over econ (like my tax-hating, conservative dad), it's usually because the other person is treating all those assumptions as categorically true, when in reality they're at least partially false.

B said...

Inelastic demand. Yes, people have inelastic demand for so many things.

When choosing between alternatives (such as Option A, B & C) that have different costs (including opportunity costs) and benefits, again it seems like decisions aren't at all rational.

But I forget that each person's demand curve is different for the same thing.

Perhaps I should revise to say that people have irrational inelastic demand.

Jesse said...

Oh, I think there are plenty of other areas where people are irrational. Sunk costs are another good example. "Well, I already paid my $10, so I'm going to sit through the rest of this crappy movie!" (Instead of leaving as soon as you realize it's crappy and doing something else with your time.) Or, in an example that's often relevant to grad students "You've already wasted 4 years of your life in grad school and show no signs of progress toward graduation, how much more of your life are you going to waste?"