Irrational Economic Man
One of the basic underpinnings of economic theory is the concept of Rational Economic Man, the idea that we all make economic decisions based on logic and reason. According to this model, when we're in a grocery store, our thought process goes something like this: "Hmm...butter is $2.39 a pound in this store, but $3.09 a liter in the store across the street...okay, converting to metric, we get...but, wait a second! Unsalted is 30 cents more per pound than salted...okay, assuming I have a heart attack when I'm 60, amortize the cost of my surgery over 50 years of eating salted butter and...yes, I believe salted is economically more sound in the long run..."
Perhaps Rational Economic Woman works this way (the literature is strangely silent on this issue), but we all know from personal experience that Rational Economic Man does not. Confronted with the choice between butter sold by the pound or by the liter, Rational Economic Man will always choose to buy a dozen bags of barbecue potato chips.
Clearly, a new standard in economics is called for. I would suggest, as our model, Irrational Economic Man in recognition of the fact that not all of our decisions are based on rational self-interest. Do you fit the new paradigm? For some indication of where you may stand, just answer the following questions:
1) The stock you bought at $27.30 a share has dropped to $12.78 a share. Do you
X) buy more at the lower price in the hope that it will rise again?
G) sell the stock short in the hope that you will be able to make back some of your losses if it continues to drop?
B) buy a Porsche?
2) Your car is making strange knocking and pinging noises. Do you
C) take it to three different mechanics, comparing their quotes to see who will do the most work for the least amount of money?
R) take it to your regular mechanic because you're comfortable with his or her price and service?
I) take it to Guido, a friend of your brother-in-law, because he promised it will save you a few bucks?
3) You've just won $10,000 in a lottery. Do you
Q) buy government bonds because, although they don't offer a high rate of return, they are a solid investment?
T) buy stocks because they offer a potentially high rate of return?
G) buy more lottery tickets because you're on a roll?
4) Although you've passed the bar, the only jobs available are in public relations. Do you
A) take a public relations job, at an admittedly lesser salary than you expected, while you look for a position with a law firm?
T) volunteer at a law firm in the hope it will lead to a lucrative legal career some time in the future?
F) spend six months on a California beach trying to find yourself?
5) The most important part of an advertisement to you is
F) the price of the advertised product.
T) the availability of the advertised product.
A) the cleavage of the woman in the ad.
6) You've just eaten 27 tubs of Hagen Dasz chocolate ice cream. Do you
A) eat one more because the marginal utility of another tub of ice cream is high enough?
F) stop eating because the marginal utility of another tub of ice cream is not high enough?
T) Throw up and start again with rocky road?
7) Your computer is three years old. Do you
B) keep the software because it continues to satisfy your needs?
C) shop around for the best price on new software and hardware upgrades to satisfy your changing needs?
D) buy whatever Microsoft is selling at the moment?
8) As a teenager, when you asked a girl on a date, did you
S) take her to a fancy restaurant in the hope that you would impress her with the amount of money you were willing to spend on her?
T) go Dutch to a middling restaurant in the hope that you would impress her with your responsibility attitude towards money?
U) drive around aimlessly until you ran out of gas because you really hadn't thought of impressing her at all?
9) Your company has announced it will be laying off 2,000 employees. Do you
K) meet with your employers to stress how important you are to the company?
L) polish your resume in anticipation of having to find another job?
M) Make a fool of yourself at the annual office Christmas party?
10) Considering a career now, would you choose
W) an expanding field like computer programming?
X) an always important field like medicine.
Y) to follow your interest in 12th century Spanish scatological verse?
ANSWERS: 1) B; 2) I; 3) G; 4) F; 5) A; 6) T; 7) D; 8) U; 9) M; 10) Y.
If you got most of the questions right, feel free to be smug about how normal you are. If you got most of the questions wrong, you're either a liar or Milton Friedman. Either way, you're beyond my help.
