Do you think like an economist? If you follow this blog you probably do, or are at least starting to. Economists are often chided for talking as if humans are rational. We clearly aren’t rational at all. We make decisions all the time that are not rational decisions. For example, the night I wrote this post I stuffed my face with two PB&Js. I knew that would be a lot of food but I still ate it. I paid for it with a belly ache. Gambling is another example of something that isn’t rational. The only way you can win in gambling is to beat the odds. It isn’t rational to try to beat the odds when they are stacked against you.
Irrational decisions are often made when we think with something other than our heads; our heart, our stomach, or some other places. We are incapable of making rational decisions all the time because we still have some primal systems still within us fighting against our evolved minds. Even though an economist would like us to all be rational so his predictions will come true, we ignore rational decisions for the potential payoff. Again, gambling is a great example.
And sometime those payoffs are huge. Bill Gates probably made some irrational decisions, and look where it got him. Mortgage bankers made some irrational decisions and some of them got a good payoff, some of them did not. So thinking like an economist ruins the human element of life. It ruins it so much that when economists describe rational humans, they usually make up a different word to describe them.
But, that doesn’t mean you can’t apply some economic thinking to help you get through some parts of your life. Let’s say you’re planning a trip to Disney World. It’s going to cost you and your family $5,000 for the whole trip. $3,000 of that will be spent on your hotel because your spouse wants a good location. However, you could stay with your spouse’s college roommate which is 45 minutes away from the festivities of the magical land. This saves you $3,000. But you will have to deal with some awkwardness, since you’re staying with someone that you don’t even really know. For whatever reason, it will just feel kind of weird. You want to save money, even your spouse wants to save money, but how do you decide what to do?
Flip the question. Would you stay with this person if someone paid you $3,000 to do it? Would you deal with the awkwardness, and the long trip to the land of Disney for a $3,000 payday? Is it worth it to you now? The answer to me becomes quite obvious. But $3,000 is a lot to me. If it’s not a lot to you then you won’t care. If you think $3,000 is a lot, then the rational decision is easy. You placed a value on the awkwardness and commute to Disney. The loss of utility is offset by the gain in savings.
But you now have another problem. Your spouse doesn’t think like an economist, even worse, they might think economists are fools. And trying to negotiate as an economist with someone that doesn’t think like one is about as hard as..
…as hard as an economist predicting the movements of the economy.
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
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