Monday, January 14, 2008

Economics or Psychology?

A Story in the L.A. Times mixes fields of psychology with economics, blurring the lines of rational and irrational. Based on the study question, I do not see any particularly correct answer.

Would you rather earn $50,000 a year while other people make $25,000, or would you rather earn $100,000 a year while other people get $250,000? Assume for the moment that prices of goods and services will stay the same.

Surprisingly -- stunningly, in fact -- research shows that the majority of people select the first option; they would rather make twice as much as others even if that meant earning half as much as they could otherwise have. How irrational is that?

Actually, not so irrational if you think about it. If the question is taken to mean that option B meant making $100,000 while living in a society where a median income was $250,000 per year, then option A might not be so bad. The individual would make "more" money, but that money would be worth far less than if, as in option A, they made twice the median income. Money does not necessarily mean wealth, and buying power does not hold equal at all times. In such an inflated society as option B, the par value for the dollar would be much less. Of course more is always better, but not when it fails in comparison to the average income of a given society. In this case, more was less. $50,000 in a society with a median income of $25,000 would mean more value per dollar as well as a better living standard, when one's income is double the median.

LA Times needs to check their economics.

However, if the study question were placed in today's socioeconomic averages, it would be more advantageous to make the $100,000 dollars, because buying power would not have any difference between dollars for each income. Less is less and more is more because the comparative value per dollar is equal.

This research goes a long way toward debunking one of the biggest myths in all of psychology and economics, known as "Homo economicus." This is the theory that "economic man" is rational, self-maximizing and efficient in making choices. But why should this be so? Given what we now know about how irrational and emotional people are in all other aspects of life, why would we suddenly become rational and logical when shopping or investing?

What is this, some kind of Marxian stump article? A choice in an economy works like this: i trade something for something else. Both parties will trade only if they believe to benefit from it. This may or may not be true, but at least I don't have someone else making the choice for me. Who is to say what is efficient and what is not?

This comes down to the fact that efficiency is relative to the values individuals ascribe to things and their projected loss/benefit weighed against real loss or benefit. Therefore efficiency can be justly described as relative in some sense of the word. I would like to see the author's explanation as to who exactly should be the judge of economic fairness or rationality? The state? Hardly so. I may not make the best decisions, but at least they are MINE.

UPDATE: I know that the article assumes that the prices of goods stay the same, but this is economically absurd if we are applying the test to society as a whole rather than a specific group.

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