Comments on: The Myth of the Rational Consumer http://www.elharo.com/blog/economics/2007/06/25/the-myth-of-the-rational-consumer/ Ranting and Raving Tue, 02 Dec 2008 13:04:26 +0000 http://wordpress.org/?v=2.6.3 By: Elliotte Rusty Harold http://www.elharo.com/blog/economics/2007/06/25/the-myth-of-the-rational-consumer/#comment-92129 Elliotte Rusty Harold Thu, 28 Jun 2007 10:11:08 +0000 http://www.elharo.com/blog/economics/2007/06/25/the-myth-of-the-rational-consumer/#comment-92129 Information asymmetry is a real issue in economics, and one economists do address (albeit not often in Microeconomics 101). When consumers don't have full information, they may well not behave in their own best interests. But I really don't think that's what's going on here. I think security is demonstrably a situation in which even when people have full and complete information about the relevant risks, they still do not act rationally. The fact is most people know that they are more likely to die in an automobile accident than in a plane crash or a terrorist attack, but they do not properly weight the risks and behave accordingly. Information asymmetry is a real issue in economics, and one economists do address (albeit not often in Microeconomics 101). When consumers don’t have full information, they may well not behave in their own best interests. But I really don’t think that’s what’s going on here. I think security is demonstrably a situation in which even when people have full and complete information about the relevant risks, they still do not act rationally.

The fact is most people know that they are more likely to die in an automobile accident than in a plane crash or a terrorist attack, but they do not properly weight the risks and behave accordingly.

]]> By: Jersey http://www.elharo.com/blog/economics/2007/06/25/the-myth-of-the-rational-consumer/#comment-92119 Jersey Thu, 28 Jun 2007 08:57:20 +0000 http://www.elharo.com/blog/economics/2007/06/25/the-myth-of-the-rational-consumer/#comment-92119 Bob makes an excellent comment. Its perceived reality that motivates purchasing not actual reality. If perceived reality is the same as actual reality then people are rational consumers. Although, if not then the whole premise is undermined. I'm not sure if anyone will want to debate in favor that all consumers (or even most) currently have an accurate perceived reality when purchasing or consuming. Economists just deny this concept. I once heard a statement (not sure if its true or not so i recommend research) that the only 100% rational people in this world are psychopaths and economists. Bob makes an excellent comment. Its perceived reality that motivates purchasing not actual reality. If perceived reality is the same as actual reality then people are rational consumers. Although, if not then the whole premise is undermined.

I’m not sure if anyone will want to debate in favor that all consumers (or even most) currently have an accurate perceived reality when purchasing or consuming.

Economists just deny this concept. I once heard a statement (not sure if its true or not so i recommend research) that the only 100% rational people in this world are psychopaths and economists.

]]> By: Amy! http://www.elharo.com/blog/economics/2007/06/25/the-myth-of-the-rational-consumer/#comment-91243 Amy! Tue, 26 Jun 2007 02:47:44 +0000 http://www.elharo.com/blog/economics/2007/06/25/the-myth-of-the-rational-consumer/#comment-91243 Heh. There is at least one school of economics (that is, one economist) that acknowledges irrationality. I've forgotten the name. Close to the time of Adam Smith; name prolly begins with R. I remembered (and remember) that particular school of thought because it used an example that I found very compelling. Standard economics post Adam Smith posits not only rational self-interest in economic behavior, but that that behavior is *economically* rational. The example that I recall pointed out that people might well continue patronizing a store because they liked the shopkeeper. That happens to be one of the things that I do--how nicely I'm treated counts *far* more, for me, than usually-minuscule differences in price. But how do you model the economic effect of friendly, cheerful personality? By the same token, companies regularly lose money because their customers have had one bad experience (often spectacularly bad, but only *one*) with returns, or customer service, or tech support, or the like. It's nearly possible to measure the nuisance value of a bad customer service experience, since it typically involves much wastage of time ... but is that really the reason that customers don't go back? Amy! Heh.

There is at least one school of economics (that is, one economist) that acknowledges irrationality. I’ve forgotten the name. Close to the time of Adam Smith; name prolly begins with R.

I remembered (and remember) that particular school of thought because it used an example that I found very compelling. Standard economics post Adam Smith posits not only rational self-interest in economic behavior, but that that behavior is *economically* rational. The example that I recall pointed out that people might well continue patronizing a store because they liked the shopkeeper. That happens to be one of the things that I do–how nicely I’m treated counts *far* more, for me, than usually-minuscule differences in price.

But how do you model the economic effect of friendly, cheerful personality?

By the same token, companies regularly lose money because their customers have had one bad experience (often spectacularly bad, but only *one*) with returns, or customer service, or tech support, or the like. It’s nearly possible to measure the nuisance value of a bad customer service experience, since it typically involves much wastage of time … but is that really the reason that customers don’t go back?

Amy!

]]> By: bob http://www.elharo.com/blog/economics/2007/06/25/the-myth-of-the-rational-consumer/#comment-91063 bob Mon, 25 Jun 2007 16:52:31 +0000 http://www.elharo.com/blog/economics/2007/06/25/the-myth-of-the-rational-consumer/#comment-91063 People don't act in their own best interests. They act in their own PERCEIVED best interests. And since everyone's perception is slightly different, or can be manipulated (e.g. FUD, security theater), it's not that hard to skew "the interests". The basic premise of economics is really just a simplifying assumption. Without it, fundamental economics would be mired in marketing and psychology. Um, never mind. People don’t act in their own best interests.

They act in their own PERCEIVED best interests.

And since everyone’s perception is slightly different, or can be manipulated (e.g. FUD, security theater), it’s not that hard to skew “the interests”.

The basic premise of economics is really just a simplifying assumption. Without it, fundamental economics would be mired in marketing and psychology. Um, never mind.

]]> By: Matthew http://www.elharo.com/blog/economics/2007/06/25/the-myth-of-the-rational-consumer/#comment-91057 Matthew Mon, 25 Jun 2007 16:41:55 +0000 http://www.elharo.com/blog/economics/2007/06/25/the-myth-of-the-rational-consumer/#comment-91057 I doubt it will make economists rethink anything. To me it is clear that economists base a lot of their conclusions on some very dubious premises. Two that come to mind are "raising interest rates slows inflation" and "raising the minimum wage costs jobs". People seems use these statements with the same confidence as if they were some basic laws of physics rather than some theory that sometimes applies and sometimes doesn't. Economists sound very intelligent but their track record is not particularly impressive, it reminds me of the old joke "Economists have predicted 22 of the last 4 recessions." With regards to peoples irrational responses, I think I am in agreement. I think people respond many times in ways that support their prejudices or their selfish intrests. For example security theater may well be a very rational response if it gets money to a congress person's district or reinforces someone's prejudice. But I wonder where we ever got the idea that people are rational? How come we have alcoholics, grossly over weight people, cigarette smokers? I doubt it will make economists rethink anything. To me it is clear that economists base a lot of their conclusions on some very dubious premises. Two that come to mind are “raising interest rates slows inflation” and “raising the minimum wage costs jobs”. People seems use these statements with the same confidence as if they were some basic laws of physics rather than some theory that sometimes applies and sometimes doesn’t. Economists sound very intelligent but their track record is not particularly impressive, it reminds me of the old joke “Economists have predicted 22 of the last 4 recessions.”

With regards to peoples irrational responses, I think I am in agreement. I think people respond many times in ways that support their prejudices or their selfish intrests. For example security theater may well be a very rational response if it gets money to a congress person’s district or reinforces someone’s prejudice. But I wonder where we ever got the idea that people are rational? How come we have alcoholics, grossly over weight people, cigarette smokers?

]]> By: John Cowan http://www.elharo.com/blog/economics/2007/06/25/the-myth-of-the-rational-consumer/#comment-91040 John Cowan Mon, 25 Jun 2007 15:53:00 +0000 http://www.elharo.com/blog/economics/2007/06/25/the-myth-of-the-rational-consumer/#comment-91040 As Schneier also points out, security theater has its virtues on occasion. If having guys in camouflage stand around with empty guns makes people <i>feel</i> about as safe as they actually <i>are</i>, then it's a worthwhile investment if the cost is not too high. As Schneier also points out, security theater has its virtues on occasion. If having guys in camouflage stand around with empty guns makes people feel about as safe as they actually are, then it’s a worthwhile investment if the cost is not too high.

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