Rational man models, as they are referred to by some psychologists, are models used by economists. For most economic theories to work (at least the ones in the past) they must assume that the person in question is acting rationally. I can’t say I’ve met a single person who acts rationally 100% of the time.
What precisely am I talking about when I say, “rational.” Really, I mean devoid of emotion. My emotional states should not have an impact on the choices I make, but we all know that cannot be true!
I will only get these citations correctly cited if someone really bugs me for them, so just listen in for now… Economists use formulas to predict behavior. This is a great idea, but sometimes it can be awfully hard to pin those variables down. One such formula is the expected utility model. Using this tool you are able to compare two alternatives, and the one that has more worth is the one a person will pick.
I will give you 100$ in one year, or I will give you 101$ in a year and one day. Which will you choose?
-Almost every single person sampled chooses 101$ in 366 days. When asked, “why not 100 dollars a day earlier,” they reply, “well I’m already waiting a year, what’s one day.”
I will give you 100$ now, or 101$ in tomorrow. Which will you choose?
-Almost everyone chooses 100$ now. When asked why, “well I can use that now, one dollar is no big deal.”
That is pretty interesting, I’d say. The expected utility model cannot explain why two different choices are being made. Clearly there is an emotional aspect to this choice, otherwise the same choice would always be made. That doesn’t actually mean the 101$ choice either. As some keen investors could make much more money with 100 dollars today, than 101$ tomorrow. In one case, one day is no big deal, in the other case, one dollar is no big deal. It just goes to show you why psychologists and economists rarely get along. As a fan of social psychology, I’d actually call the difference in explanation a byproduct of post-choice justification. Using this same example, my next post will discet what justification is, and how it came into play in this sitatuon. I know this excessively read blog will have people overflowing with anticipation!