Class #3, 1/26/12

• Altruism is when I do something for someone else's benefit and it ends up hurting me. Economists call this irrational behavior. 
• An example: I place $1000000 in front of someone's door anonymously for no other reason than to give that person money. Because of doing this, I hurt myself in some way (less money for food, clothes, etc.)
• We also discussed rational behavior. Prof. Rizzo pointed out how truthfully, no behavior is completely irrational. No one, or very few, people can be truly altruistic. Let's say someone donates money to a college. Sure, they are helping someone out, but there is a reason behind why they are doing such a thing. Maybe the person gets a school named after him for donating.
• Another example Rizzo gave is this: if a beggar comes to your front door asking for money, it is proven that most people give him money not because they want to help him, but rather because they want him to get away from their house.
• There is something that limits our ability to be irrational, which keeps in effect the demand curve sloping down (as a cost increases, there is less of a demand). Consider hunger and one's stomach. The more you eat, the less hunger you have. You could continue eating, but there is something that prevents us from doing this: our stomach becomes so full that it hurts to eat more (the cost of eating is getting higher) and then we go on to stop eating. Thus we are acting rationally thanks to a natural phenomenon of our body.
• Rizzo also spoke about paternalism, which is when people act in a fatherly matter to help us (i.e., enacting a policy to help society improve). Example of governmental paternalism is the many policies the government has enacted, such as its rules on cigarettes, sugar regulations on food, etc.
• Just because the government enacts these rules doesn't mean all of the changes will provide solutions to the problems. You have to consider unintended consequences.
• A policy may be sensible for many people, but unintended consequences can come into play, causing other issues.
• Bottom line: you can't prevent every bad decision of society. It is a waste of resources to try to enact so many policies.
• Rizzo says that paternalists decide on policies based on their own preferences
• In short, there are no truly irrational behaviors unless someone is truly altruistic. If someone drinks and drives, they very well could be doing it for a specific reason that is at least rational to themselves. It may seem irrational to the majority of society.
• This course of Price Theory will show us to consider benefits and costs of decision making and figure out why decisions have been made.
• A nudger, as defined by Rizzo, is a person who tells others what to do because that is what works best for the nudger. The nudger tries to act like they are trying to help in the best interest of others, but really, they have a separate agenda. Consider companies that are trying to manipulate consumers to make extra money.

Class #2 on 1/24/12

Today in class, we learned more about rationality. In class, we learned rationality means:

1. Actors have well-defined preferences and thus have some idea/goal what they want to achieve.
2. Once we have that goal, there is some way we attempt to achieve that goal.

Massive amount of ridicule is given towards the rationality assumption (that we all think rationally). It's important to note that we all don't sit and make lists about what's rational. It is something that is internal.

Keep in mind: It doesn't take a lot of people to be rational to "get the price right."

Here are the notes put together by Professor Rizzo about what today's class was about:

NOTE: This is not my work. Below is the work of Professor Michael Rizzo from the University of Rochester.

Rationality Summary

The rationality assumption is what makes economics economics, apart from the other social sciences. At least so it seems.

However, from the very obvious observation that irrational behavior does occur, and in some settings quite systematically, it has caused some (many) to openly question whether economics has any value at all, or more mildly, if we need to amend our thinking about economic processes.

In other words, if individuals do not always have a goal in mind, if they are not always consistently following a plan to achieve some objective, if they are ignorant, if they are subject to random behavior, if they are prone to static behavior, does that mean that the typical rules and laws and conclusions of economics do not apply?

The point of today’s talk was to answer with an EMPHATIC … NO!

And the reasons for No include all of the following (note that any one of these would be enough to cast doubt on the need for a “revolution” but taken as a whole, they make it wholly ridiculous that these criticisms have any teeth).

1.     Most importantly, in my view, is that the major economic theories and concepts follow from logical chains of reasoning and NOT from the rationality assumption. As Becker explained (and as you will briefly show in a future recitation) even if individuals behaved irrationally, because scarcity forces a restriction of choice sets, we would still see demand curves downward sloping, and we would still see the importance of comparative advantage and the gains from trade.

2.    But suppose you do not like such a proof. How? I don’t know. What we also know is that for economics to work, even if you want to argue that it DOES rely in rationality, we do not need any actor to behave rationally all the time, or more important, we only need a few economic actors to act rationally, to be able to generate the important theorems in economics. The process of arbitrage does not require millions of people, but only a few.

3.    But suppose you don’t like THAT idea either. Well, it turns out that most of our behavior, is, in fact, rational. The fact that these behavioral illustrations are interesting … is … because … they are ANOMALIES.

4.    But suppose you don’t like THAT idea either. And I think this really is the doozy. If you want to argue that irrationality is systemic, and you wish to ignore the proofs which tell us that the laws of economics do not require such an assumption, then what makes you think that actors are limited in their irrationality to only the economic sphere of their lives? When we walk into the voting booth, do we suddenly drop the shackles of irrationality? When we walk into political office, do we suddenly drop the shackles of irrationality? In our love lives? That is pure sophistry. And if you wish to argue that the power of the collective mind overcomes irrationality in these spheres, then we are back to my point in TWO above … that markets have the same collective brain, and in fact it functions much more effectively at “neutralizing” the impacts of irrational people on outcomes.

5.    And suppose you simply dismiss 4 … do you think actors in the political process are uninfluenced by incentives? Do you think, for example, that no corporation stands to gain from paternalistic activity? For example, DuPont chemicals was instrumental in getting marijuana prohibited. But not cigarettes? Why? Well, the hemp plant was a major competitor in the production of materials and fabrics DuPont was in the process of producing at the time of the legislation, but the tobacco plant posed no such problems. I am sure you think this is just one simple, isolated, incident.  And I am 6 feet tall.

Econ 207 Class #1 on 1/19/12

• Resources can be scarce even if you have an infinite amount of money because money can't always buy everything.
• Every choice involves scarcity considerations
• Efficiency=giving people as much of something as they desire/want
• Equilibrium- there is nothing you can do to improve your situation. In short, it is as good as it can be. It doesn't mean your situation is perfect, but that it can't be any better than it already is.
• Cost of activity- how much pain/inconvenience you would be willing to endure to do an action
• Consider the money and getting up to change song example. Say Rizzo is sitting on the ground comfortably with his two cats. A song is playing that he doesn't like. Should he get up to change the song if someone is willing to pay him money to do so?
• Well, at a certain amount of money, you will alter your decision. At one penny, he may not be willing to get up. At $1,000, he might. There is a certain amount of money that makes you change your mind.
• Also have to consider health: the healthier he is, the less money he would demand to get up because the less strain he'd be putting on his body. If his back hurt, that would affect his decision and he would demand more money.
• Also, one should consider how income affects the decisions- if someone is rich, they would demand more money to get up. If someone desperately needs money, he will demand less money to get up.
• Comparative Statics- Understanding why people make certain decisions. 
• It is important to note that when considering that cost of activity, we need to move away from explanations that are reasoned/backed up by one's preferences. Saying someone did something (like get up to the change the music) because that is what they value is not sufficient explanation anymore.
• There was the Super Bowl commercial for the company that was not even in existence yet. Prof. Rizzo explained that economically, the business maybe did this because the company wanted to incur a large sunk cost before it started up the business to truly motivate itself to work hard and make back the loss in the future, which in turn would mean the company was successful.
• We need models to tell us if something is a reliable/unreliable idea. Thus, we use this to determine how to be a good price theorist:
1. Formulate the economic problem
1. Understand what the desires of those people are- in other words, what are they trying to maximize?
2. What are all the constraints they are facting?
2. Optimization- people are rational if they have goals and attempt to navigate around constraints
3. Equilibrium- understanding where peoples/ behaviors will go based on the actions they have thus far taken