Archive for the 'Behavioral Economics' Category

Dec 06 2011

Grinchonomics, 2nd edition: “Santa’s hollow threat…” or “how the Economist can help save Christmas”

Last year, I argued that Christmas was the most inefficient time of the year due to the large loss of welfare that goes with the tradition of gift giving. This year I will argue that Santa Claus, as the tradition is embraced in the English speaking world, fails to provide children with strong enough incentives to behave nicely, thus resulting in too much naughty behavior, reducing society’s welfare in the months leading up to Christmas. We’ll explore a market-based solution to this market failure,  already being practiced across the European continent, which harnesses the power of incentives to improve children’s behavior, and the overall efficiency of the Christmas holiday.

The lyrics to the popular Christmas song, Santa Claus is Coming to Town, are a warning to little children that they better not act naughty, OR ELSE! Read them and see what I mean:

You better watch out, You better not cry
Better not pout, I’m telling you why
Santa Claus is coming to town
He’s making a list, And checking it twice;
Gonna find out who’s naughty and nice
Santa Claus is coming to town
He sees you when you’re sleeping, He knows when you’re awake
He knows if you’ve been bad or good, So be good for goodness sake!
O! You better watch out! You better not cry
Better not pout, I’m telling you why
Santa Claus is coming to town

“So be good for goodness sake,” a child will say, ” OR WHAT? What are you going to do Santa, if I am naughty? Are you not going to bring me a present that I really want?”

You see, this is the problem with the Santa I grew up with. He is all carrot, and no stick. Humans respond to incentives, and the Santa I grew up with is great at incentivizing nice behavior, but he’s really bad at disincentivizing naughty behavior. Consider the following:

  • Santa sees me when I’m sleeping and knows when I’m awake, so he knows when I’ve been bad or good. If I’m good, the implication is that I will be rewarded with wonderful gifts from Santa come Christmas time.
  • If I’m bad, however, I will experience no loss whatsoever. While I will not benefit as much as the good children, nothing will be taken away from me. I will be made no worse off by being naughty, rather the degree to which I will be made better off is reduced.

This is a classic incentive problem. Santa provides rewards for good behavior, but fails to dole out punishment for bad behavior. A culture which embraces this benevolent Santa will invariably produce too many naughty children. Such a market failure can be illustrated clearly using benefit and cost analysis:

As economists, we’re always exploring ways to improve efficiency in the markets for different goods, services, and human behaviors. Clearly, in the market above, in which children determine how naughty they will be based on their perceived private benefits and costs of their own behavior, there is a market failure.

Due to Santa’s hollow threat (“…you better watch out!”), children lack a strong disincentive to not act naughtily, and therefore choose to engage in naughty behavior to the extent that overall welfare in society is reduced. The marginal private benefits of naughty behavior are far greater than the marginal social benefits of naughty behavior (let’s face it, acting naughty is FUN!).

So how could Santa better harness incentives and disincentives (both the carrot and the stick) to reduce naughty behavior and increase overall welfare in society, thereby increasing the overall efficiency? Santa must do more than just encourage good behavior; he must also strongly discourage naughty behavior.

Well, as it turns out, the Santa I grew up with is not the only version of Santa Claus in the world, and in fact the Santa known to millions of children all over Europe is one with a fearsome, wrathful side that is not timid about doling out punishment to naughty children. Allow me to introduce the European Santa, and his evil alter-ego, known here in Switzerland by the ominous name Schmutzli (which translates loosely to “dirty face”).

img source: http://www.ricksteves.com

The Swiss news site Swissinfo.ch introduces the character Schmutzli:

This is not the Santa Claus known to English-speaking countries but the Swiss version – who is normally accompanied by a strange-looking individual with a blacked out face.

The Swiss Father Christmas was based on Saint Nicholas, whose feast day was celebrated on Saturday – his Swiss German name, Samichlaus, alludes to that. But the origins of his sinister companion are less easy to make out.

Known as Schmutzli in the German part of the country… Samichlaus’s alter ego usually carries a broom of twigs for administering punishment to children whose behaviour throughout the year has not been up to scratch.

You see, here in Switzerland, and in much of Western Europe, Santa brings gifts for the children who have been nice, but his partner Schmutzli delivers harsh punishments to those children who have been naughty. Schmutzli, who goes by different names in other parts of Europe, is known to throw naughty children in his sack, carry them into the woods, and administer a fierce beating with his birch stick, and for the naughtiest children, to eat them or throw their beaten bodies into a river.

Schmutzli, quite literally, provides the stick to accompany Santa’s carrot. In Europe, children not only receive wonderful rewards from Santa for good behavior, but fierce punishments from Schmutzli for naughty behavior.

From an economic perspective, Schmutzli’s existence increases the efficiency of the Santa character dramatically, and therefore improves overall welfare in society by giving children both an incentive to act nice and a strong disincentive to act naughty, thereby internalizing the negative social costs of naughty behavior. The outcome can be as illustrated as below:

As the graph illustrates, Schmutzli’s presence by Santa’s side come Christmas time forces children, in their decisions regarding naughty behavior, to account for the likelihood that Santa truly “knows when you’ve been bad or good”. For if he does know when you’ve been bad, Santa will unleash Schmutzli, his child-hauling sack and his birch stick on those whose behavior has been more naughty than nice.

Schmutli’s existence in Switzerland’s Santa story internalizes the external costs of naughty behavior among children, and thereby reduces the marginal benefits enjoyed by naughty children, reducing the actual number of naughty children and the size of the deadweight loss they impose on society. Fewer children will act naughty, the externality is reduced, and overall welfare in society improves.

There you have it. The deadweight loss of Santa. If you ever doubted that Economists could find the inefficiency in Christmas, I’ve shown you once again that it is indeed the most inefficient time of the year. By providing a balance of rewards and punishments, Schmutzli’s presence corrects the incentive problem of an always benevolent Santa. Society as a whole should therefore suffer from less naughty behavior among its children.

Once again, a little Economic analysis can help make Christmas more efficient for all!

2 responses so far

Jul 01 2011

Rational ‘bee’havior

Economists make several assumptions about humans, a fundamental assumption being that we are rational decision makers, able to weight costs and benefits of our actions and pursue the option that maximizes our benefits and minimizes our costs, thus leading to the greatest personal happiness, or utility. Only if this assumption holds true does a free market economic system, made up of individuals pursuing their own interests lead to a socially beneficial outcome. 

But are humans the only animal driven by rational, self-interested, benefit maximizing and cost minimizing behavior? Is our ability to make the right decision based on a complex set of options and variables made possible by our large brain and hundreds of thousands of years of adaptation? To some extent, our biology must drive our decision making and therefore the institutions and organizations that have allowed our species to thrive. But let us not think we are the only species to have thrived due to our rationality.

If you’re like me, you’ve often wondered to what extent animals can think. I have a dog, and after five years I still can’t figure out if he really likes me or if he has just learned that I’m the one who feeds him and scratches his belly, so he demonstrates the behaviors that offer the greatest rewards in terms of food and attention, and those behaviors are ones that I enjoy about him. It is a win win relationship, for sure, but is his behavior evidence of rationality, or just his biological need for food and attention? Is my dog’s behavior the outcome of a series of rational, self-interested calculations, or is it something more simple we usually associate with animal behavior: instinct?

Rationality may be as much a biological instict as an economic one. A recent study out of the UK has found that bumble bees are able to make rational decisions based on complex sets of options to mimimize costs and maximize benefits, much as humans must do countless times every day.

When deciding which flowers to fly to when collecting nectar, a bee must consider two variables: distance and the amount of nectar available in a particular flower. Of course, the distance the bee must fly represents the cost of collecting the nectar, and the amount of nectar in the flower is the benefit of having flown to it. The report explains: 

“Computers solve it (the problem of which flower to fly to) by comparing the length of all possible routes and choosing the shortest. However, bees solve simple versions of it without computer assistance using a brain the size of grass seed.”

The team set up a bee nest-box, marking each bumblebee with numbered tags to follow their behaviour when allowed to visit five artificial flowers which were arranged in a regular pentagon.

“When the flowers all contain the same amount of nectar bees learned to fly the shortest route to visit them all,” said Dr Lihoreau. “However, by making one flower much more rewarding than the rest we forced the bees to decide between following the shortest route or visiting the most rewarding flower first.”

In a feat of spatial judgement the bees decided that if visiting the high reward flower added only a small increase in travel distance, they switched to visiting it first. However, when visiting the high reward added a substantial increase in travel distance they did not visit it first.

The results revealed a trade-off between either prioritising visits to high reward flowers or flying the shortest possible route. Individual bees attempted to optimise both travel distance and nectar intake as they gained experience of the flowers.

“We have demonstrated that bumblebees make a clear trade-off between minimising travel distance and prioritising high rewards when considering routes with multiple locations,” concluded co-author Professor Lars Chittka. “These results provide the first evidence that animals use a combined memory of both the location and profitability of locations when making complex routing decisions, giving us a new insight into the spatial strategies of trap-lining animals.”

In economics, we refer to the behavior descibed above as cost, benefit analysis. It surprised me to read that insects, when faced with a trade off between further distance and more nectar, weigh both the cost and the benefit, and pursue the action that maximizes their profit, which is the bee’s case is a function of both distance of the flower and quantity or nectar collected.

Humans and our institutions make similar cost, benefit calculations. A business produces a quantity of output and sells it for a price that maximizes the difference between the price at which it can sell its product for and the average cost of production, thus maximizing its profits. A consumer will purchase a combination of goods and services at which the amount of utility per dollar is equalized across the various goods consumed, thus maximizing the consumer’s total utility

Bees, with their brains the size of a grass seed, weigh variables nearly as complex as those weighed by businesses and individuals in their economic decisions. Are bees rational? Or is their behavior purely biological instinct?

3 responses so far

Nov 02 2009

When is acting irrational the rational thing to do?

FT.com / Comment / Opinion – Magic and the myth of the rational market.

Imagine you’re a poor farmer who has always had just enough to feed your family, with no surplus left over to sell. Then one day the government decides to grant your family and your neighbors enough land to grow your own food and plenty more to sell on the market. The government’s intention, of course, is for you to cultivate all your land, sell your surplus, generate income for your family to improve your quality of life, send your children to school and save for the future.

You’re the farmer. You’ve just been given land. What would you do?

1. Plant crops on all your land, harvest the crops, sell the surplus and enjoy the profits from your surplus?

OR

2. Plant crops on only part of your land, grow enough food to feed your family, and let the rest of the land lie uncultivated. You have no surplus, nothing to sell, and continue to live the way you always have lived: poorly.

The science of economics assumes that individuals always act rationally in their own self-interest. Self-interest is the ultimate motive of economic actors: firms are profit-maximizers, individuals are utility-maximizers. The theory of rational behavior would lead one to assume that the farmer would pursue option 1 above. But in Papua New Guinea, where the government recently relocated thousands of displaced farmers to new plots of land, it is more common for farmers to chose option 2:

“If they see me planting too much cocoa, they’ll do things to my land and my family, and they won’t bear fruit; really bad things; puripuri and other witchcraft.”

Such an avoidance of profit maximisation might have appeared economically irrational. But from the perspective of those villagers, putting in extra work just to make oneself a target for the jealousy of one’s neighbours would be highly irrational behaviour.

Economists need to re-think their assumptions on rational behavior. What appears irrational to one person may be perfectly rational to someone else, as in the case of the Papuan farmers who only plant half their land. Humans, it seems, are a bit more complicated than the cold, calculating arithmeticians economists have long assumed them to be.

In the wake of the largest economic crisis since the great depression, the assumption of rational actors interacting in rational markets has come into question. A new field of economics blending the traditional study of resource allocation in the market place and human psychology has arisen to tackle the challenge of better understaning the seemingly irrational behaviors of investors, buyers and sellers in today’s global economy:

One response to the current crisis has been a rise in the popularity of behavioural economics, which examines the psychological and emotional factors behind transactions. These models drop the assumption of the rational actor yet implicitly keep the same model of economic rationality at their heart. We may diverge from the path of rationality for all sorts of psychological reasons but only because emotion, Keynes’s famous “animal spirits”, clouds our judgment.

To break human behavior down to the basic pursuit of profits by producers and utility by consumers neglects to acknowledge the “animal spirits” within us all. Economics is entering a new era, in which psychology and markets are intertwined. Rational behavior will remain a basic assumption of the science, but a re-defining of what it means to be rational will allow economists to better understand the behaviors of individuals, investors and firms as the economy emerges from a slump Alan Greenspan might say was ushered in on a wave of irrational exuberance.

Discussion Questions:

  1. Are economists wrong to assume that individuals always act rationally? Why do the Papuan farmers only use half their land? Are they stupid or lazy?
  2. Can you think of any examples in which you or someone you know has done something that was not in his best economic self interest?
  3. Is charity irrational? What about gift giving? If you calculated that the chance of getting caught steeling something you REALLY wanted was 0%, wouldn’t it be irrational NOT to steal? What would keep you from stealing that thing if you deemed it rational to do so?

2 responses so far

Oct 27 2009

Homo Economicus – “Economic Man”: Guest Lesson for ZIS Theory of Knowledge classes

Homo Economicus, the “Economic Man” is the concept underlying most economic theories. It holds that all humans are purely self-interested, rational actors who have the ability to make judgments that fulfill their subjectively defined ends. In modern economic theory, the end man seeks is generally accepted to be increasing monetary well-being and material wealth.

Philosophical foundations of “homo economicus“:

Aristotle (350 BC):

Again, how immeasurably greater is the pleasure, when a man feels a thing to be his own; for surely the love of self is a feeling implanted by nature and not given in vain, although selfishness is rightly censured; this, however, is not the mere love of self, but the love of self in excess, like the miser’s love of money; for all, or almost all, men love money and other such objects in a measure. And further, there is the greatest pleasure in doing a kindness or service to friends or guests or companions, which can only be rendered when a man has private property. These advantages are lost by excessive unification of the state.

  • What does Aristotle think about the interference of government in the private property rights of man?

Adam Smith (1776):

In almost every other race of animals, each individual, when it is grown up to maturity, is entirely independent, and in its natural state has occasion for the assistance of no other living creature. But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer: and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher the brewer or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages.

  • How does Smith believe the pursuit of individual self-interest can lead to benefits for society as a whole?

John Stuart Mill (1836)

What is now commonly understood by the term “economics” is not the science of speculative politics, but a branch of that science. It does not treat of the whole of man’s nature as modified by the social state, nor of the whole conduct of man in society. It is concerned with him solely as a being who desires to possess wealth, and who is capable of judging of the comparative efficacy of means for obtaining that end. It predicts only such of the phenomena of the social state as take place in consequence of the pursuit of wealth. It makes entire abstraction of every other human passion or motive; except those which may be regarded as perpetually antagonizing principles to the desire of wealth, namely, aversion to labor, and desire of the present enjoyment of costly indulgences. These it takes, to a certain extent, into its calculations, because these do not merely, like our other desires, occasionally conflict with the pursuit of wealth, but accompany it always as a drag, or impediment, and are therefore inseparably mixed up in the consideration of it.

  • According to Mill, labor is not something humans value for its own sake, but only because it allows us to do what?

Fredrick von Hayek (1930s):

We will benefit our fellow man most if we are guided solely by the striving for gain. For this purpose we have to return to an automatic system which brings this about, a self-directing automatic system which alone can restore liberty and prosperity.

  • How would Hayek respond to those who argue that the government’s role in society and the economy is to promote fairness and equality?

Are you a “homo economicus“? – The Golden Balls Game

The prize: $1 million

How to play:

  • Find an opponent from among your classmates.
  • You and your opponent have never met before today, never spoken to one another, and will never see nor speak to one another again after the game ends.
  • Since you do not know or care about your opponent, you must play this game with your own self-interest in mind, and assume that your opponent will play it with his or her self-interest in mind.
  • You have in front of you two folded pieces of paper. One says “SPLIT” and one says “STEAL”
  • You must decide which piece of paper to select, based on the following possible outcomes

The payoffs:

  • If both players decide to “split”, each player will take home $500,000.
  • If one player chooses to “split” and the other chooses to “steal” then the one who chooses to steel will take home $1 million, and the one who chose to split will get nothing
  • If both players choose to “steel”, both players go home empty handed.

Split

Steal

Split

Player 1: $500,000

Player 2: $500,000

Player 1: $1 million

Player 2: 0

Steal

Player 1: $0

Player 2: $1 million

Player 1: $0

Player 2: $0

Let’s play!

  • You only have one chance to play this game. Remember, you care only about yourself and should do what is best for you.
  • On the teacher’s command, reveal your decision to your opponent.
  • Take note of your payoff and report it to the teacher

Discussion:

  • What was the outcome of your game?
  • Was the outcome rational? Was it predictable?
  • Did the outcome reflect the concept of “homo economicus“? Were you and your opponents’ decisions purely self-interested and coldly rational, intended to maximize your OWN payoff?
  • Are you a homo economicus? What would homo economicus have done? Why?

Videos:

Golden Balls – the real gameshow: http://www.youtube.com/watch?v=p3Uos2fzIJ0&feature=player_embedded

[youtube]http://www.youtube.com/watch?v=p3Uos2fzIJ0&feature=player_embedded[/youtube]

  • Which player was more like homo economicus? Sarah or Steve?
  • Which player acts rationally? What makes it rational?
  • Which player acts irrationally? What makes it irrational?

“The Trap”: Intro to game theory and rational self-interest in politics and economics: http://www.youtube.com/watch?v=qzNcY-gZdiA&feature=related

[youtube]http://www.youtube.com/watch?v=qzNcY-gZdiA[/youtube]

  • John Nash’s Game Theory proved that “a system driven by selfishness did not have to lead to chaos”, that “there could always be a point of equilibrium in which everyone’s self-interest is perfectly balanced against each other”? How does such a theory support the concept of homo economicus?
  • What is the Prisoner’s Dilemma? “The rational choice is always to betray the other person.” What does this say about humans in society? Is government regulation needed to prevent constant betrayal by greedy, self-interested individuals? Or are constant betrayal and self-interest themselves capable of achieving a socially optimal outcome?

Noam Chomsky on the inefficiency of markets and the threat posed by de-regulation: http://www.youtube.com/watch?v=QPl27BO7fHE&feature=related

[youtube]http://www.youtube.com/watch?v=QPl27BO7fHE[/youtube]

  • What is the “externality” of financial market failure that Chomsky identifies?
  • Why is the failure of a financial market more worrisome than the failure of a market like that for used automobiles?
  • How does Chomsky feel about the de-regulation of financial markets? Does he think markets are always rational and efficient?

Modern applications of the concept of Homo Economicus:

  • Rational Expectations Theory (RET): This economic theory assumes that humans acting generally in their own self-interest will make rational decision based on the best available information. Therefore, it assumes that people (and therefore, markets, which are made up of rational people) do not make systematic errors when predicting the future.
  • Efficient Markets Hypothesis (EMH): Rooted in Rational Expectations Theory, which itself is rooted in the concept of homo economicus, EMH says that prices in markets, particularly financial markets (whose collapse has caused the today’s global economic crisis) represent the best possible estimates of the risks attached to the ownership of various financial assets (stocks, shares, bonds, etc…) Asset bubbles are therefore impossible, since “bubble” implies an irrational and unsustainable increase in the value of an asset which will ultimately “burst”. Markets are “self-correcting”, and the most effective tool for assuring economic stability is free markets, rather than government regulation or oversight.

Connecting the dots – from Homo Economicus to today’s Economic downturn:


The general acceptance of theories rooted in the concept of homo economicus led to the de-regulation of financial markets, which allowed money and resources to go whichever way the “market” (rational or not) determined.

  • During the last decade, the market decided that more and more money and resources should go towards particular assets, specifically the United States mortgage market (the market for new homes in the US).
  • As money flooded the US home mortgage market, it became cheaper and easier for Americans to get loans to build a home. GREAT, RIGHT?! Well, only until it came time to pay back those loans.
  • Trillions of dollars worldwide became tangled up in the US mortgage market, representing households’ savings from around the globe.
  • When Americans suddenly found their loans coming due, they found it hard to repay them due to adjustable interest rates and falling home price (supply had grown more rapidly than demand).
  • American and many Europeans began defaulting on their mortgages, meaning all that money that had been lent to home buyers literally disappeared.
  • Banks and financial markets faced a “liquidity crisis”, meaning they had no money.
  • Lending stopped to households, firms, and other banks , meaning spending on goods and services decreased, meaning jobs were lost and economies entered recession.
  • How could any of this have happened if the concept homo economicus and the economic theories based on the concept are correct? Are humans always rational, calculating, perfectly informed, self-interested beings acting purely in their own self-interest?

Conclusion: The concept of homo economicus has formed the basis for economic theories for centuries and for major macroeconomic policies over the last 30 years. Policies of “market liberalization” (freeing the market from the guiding, regulatory hands of government) have led to great prosperity, but even greater risk and volatility as irrational exuberance over asset prices has led to inefficient market outcomes, bubbles, and financial shocks plunging the “real” economies of the world into recession.

Perhaps a more complete understanding of humans is needed as the human science of economics enters a new era. The human as a cold, rational, calculating creature interested in only his own gain is an over-simplification, and forming theories and policies on such an assumption is dangerous. The future of economics must incorporate a more complete and complex understanding of human behavior if the economic crises of the last two years are to be avoided down the road.

2 responses so far

Aug 23 2009

Rational behavior, opportunity cost, marginal analysis – An intro to the Economic way of thinking

Freakonomics – Laid-Back Labor – New York Times

If you’ve spent much time on this blog, you know that I’m a fan of the boys at Freakonomics, the book that so aptly applies economic theory to the seemingly benign happenings of everyday life. In the article above the Freakonomists examine the difference between labor and leisure. I thought this article did a good job of introducing some of the basic concepts behind how economists think about the world.

As this year’s AP students begin to delve into the world of economics, one of the early topics they study will be the concept of humans as rational beings engaged in the constant pursuit of utility (the economist’s word for happiness). According to our text, “Economics assumes that human behavior reflects ‘rational self-interest.’ Individuals look for and pursue opportunities to increase their utility.”

If, as economists say, the purpose of life it the pursuit of utility, then presumably work is only a tedious but necessary means to an end, which we assume to be leisure. So why, as pointed out in the article above, do so many people willingly choose to spend so much time and money doing things like cooking, knitting, gardening, working in the yard, and other tasks that appear to be work, when they could easily pay others to do these menial chores for them, thus giving them more time for leisure? As the authors say, “Isn’t it puzzling that so many middle-aged Americans are spending so much of their time and money performing menial labors when they don’t have to?”

Where exists the line between work and leisure? This seems like an apt question to explore from an economic perspective. Here’s the author’s view:

“Economists have been trying for decades to measure how much leisure time people have and how they spend it, but there has been precious little consensus. This is in part because it’s hard to say what constitutes leisure and in part because measurements of leisure over the years have not been very consistent.http://www.rideau-info.com/canal/images/locks/mowing.jpg

Economists typically separate our daily activities into three categories: market work (which produces income), home production (unpaid chores) and pure leisure. How, then, are we to categorize knitting, gardening and cooking? While preparing meals at home can certainly be much cheaper than dining out and therefore viewed as home production, what about the ‘cooking for fun’ factor?”

Why a professional (let’s say a lawyer) who spends 50 hours a week in his office, earning somewhere in the range of $100 an hour for his labor, would choose to spend two hours mowing his lawn on a Saturday, rather than hiring the neighbor boy to do it for him, truly poses an economic paradox.

Let’s see why: If this man’s labor is worth $100 and hour, then we can calculate the opportunity cost of mowing his own lawn as $200 plus the value to this man of the leisure he could have enjoyed by not mowing his lawn. The man probably could have hired the neighbor boy to mow his lawn for $20, which would have then freed him up to pursue his own leisure activities (reading, working out, watching a movie, etc.) during those two hours, and compared to the $200 value of his own labor the $20 seems like a bargain. So is a lawyer who mows his own lawn acting irrationally?

It would seem the line separating leisure from work has blurred in modern times. A hundred years ago an activity such as sewing or caring for a lawn would certainly have been viewed as work, but today the behavior of millions of Americans would indicate otherwise. As a science rooted in the belief that humans are rational pursuers of their own happiness and leisure, the paradox of the lawn mowing lawyer poses several interesting questions for students of economics.

Discussion Questions:

According to chapter one of our text (McConnell and Brue’s Economics, 17th Edition), “Purposeful (rational) behavior does not assume that people and institutions are immune from faulty logic and therefore are perfect decision makers. They sometimes make mistakes.”

  1. Is the lawyer who mows his own lawn defying a fundamental rule of economics, that people act rationally? Is he making a mistake by not hiring the neighbor boy to do it for him?
  2. What is meant by opportunity cost? Give an example of a decision you have made recently that involved an opportunity cost.
  3. How is the lawyer’s decision whether or not to mow his lawn rooted in marginal analysis? Describe a choice you’ve made recently that involved marginal analysis.

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