decision making

Economics is the science of decision making- its pretty cool that there is a science on decision making, because at first glance it appers as if a science on something in the mind that takes place without people seeing it could not exists because there would be want of a lack of data, but there are ways to measure and analyse how people make decisions. Take for example an unemployed person, we can infer from their status that they have made a choice not to work, so it is not necessary to delve into someones mind to have a science on decision making as the decisions people make from day to day, whether large, like going to university, or small, like buying a film, are respresented by consequent actions, for example people that decide to go to university move to campus and study something, or to take a more gruelling example people that decide to commit suicide end up killing themselves. So it must follow that before every action takes place a decision has to be made, so really if you think about it economics has more data to study than other sciences! Think of it this way, every person makes hundreds of decisions a day and there are 6,706,993,152 people in the world, that is a huge amount of decisions made and this fact cannot and should not be ignored.

People make around 221 food related decisions pe day according to a study by Brian Wansink in the January issue of Environment and Behavior. When people were asked how many decisions a day they made on food they said 15, but tests show it is more like 221 because of a large, wide range of decisions e.g. when to eat? How much to eat? What to eat? How much to spend on food? Where to get food? Where to eat? How to cook it? What not to eat? What cutlery to use? How to cook? What plate to use? How to clean up after eating? To eat with a knapkin or not? How many times to chew? What size to cut food to? The more you think about it the more mind boggling it becomes and the more detailed decisions you can think. Like, what colour plate to use? What position to sit in when eating? Whether to watch tv or listen to the radio or read a book whilst eating? Whether to count calories? The point is there a huge numbers of decisions being made, and in economics the most important decisions are analysed, for example to decision to work or not, the decision to spend money or not, how to pay for a new business? What policies to follow to help the poorest countries in the world come out of poverty? What to sell? How much to sell it for? Who to sell it to? The most famous text book in economics defines economics as the study of the choice of what, how and for whom to produce. (begg)

I think the way economics should be studied is to divide up the key decision areas into distinct groups and then focus on each group separately whilst studying possible links between the groups, for example decisions should be separated into areas like labour markets (getting jobs), business finance, decisions made by individuals (micro), decisions made by large groups of the same people (macro), economic growth, policies, and etc.

The next critical question to answer is how to go about studying economics- well first data needs to be collected which involves making observations of the real world and recording them using precise and effective methods. The data needs to be organised and any unreliable data needs to be discarded. The data needs to be analysed in relation to something else to find out relationships so theories can be formulated, for example data on decisions about how much to eat could be tested against the price of food to see if one effects the other, this is done by holding everything else constant, ceteris paribus, which means to ignore but not forget the important influence of other factors on a variable, variables are observations that change when another observation is changed, they vary, for example as food price goes up people eat less because they cannot afford as much food. When we know what causes the variable in question to change we can better understand how different decisions effect each other and from this we can make predictions about decisions. One could predict that a rise in food prices that leads people to eat less could eventually lead to starvation of people if the prices rise extremely high because no one can afford to eat, so there must be something that keeps prices from rising so high, like laws and institutions, because people do afford to eat as not everyone is dead from starvation. We also know that if food prices are too low people eat too much and get fat and become ill and go to hospital and the hospital becomes full and taxes are raised to pay for more beds and doctors. These predictions are very powerful. By knowing this the government can implement laws to stop food sellers from exploiting peoples need to eat and this prevents us from eating everything and us all starving. Maybe some readers believe this is not true but it is based on reliable data collected from the real world and the reasoning used has been correct so the conclusions drawn must be the truth, admittedly this is not perfection, we say ceteris paribus but what if other things do have an influence and we don’t know about them? This is a valid point but everything has its limitations and economics does the best with what it has, in fact it does a very good job, admittedly some economics is better than others but I believe the field of economist is strong and full of hard working researchers and students who are making the science of economics better as we speak.

What we have been talking about so far is positive economics as it is about “what is” but economics also uses value judgements “what ought to be” type statements. These types of judgements are not able to be proven, it is not like the price rise in food means people buy less food, these are value statements based on what society values, for example, the government should provide poor people with extra money so they don’t have to sleep outside without warm clothing. Indeed, many economists have made some very convincing arguments using normative economics. This may be because people make decisions on values of society, so in essence it is just as important as positive economics.

I think the best economics comes from studying relationships in as much detail as possible and by using data that is irrefutable as this proves to other people that it is the truth and that wild assertions can indeed be backed up by data. As long as economists keep in mind it is a science about decision making and don’t try to mix it up with other sciences then economics should progress as best as it possibly could. It is true that thoughts of unrelated things that enter into the study of economics only seek to cloud the economists judegement as two sciences shouldn’t be mixed as economics on its own is powerful enough. Its true that all sciences share some common methods, like analyzing data, using graphs, taking real world observations, making theories, studying other scientists in the same field, writing essays, a love of understanding of the world, wonder at the universe, and etc.

Sometimes you read an essay in economics and it is hard to understand and it is like reading another language, this is a pain for all economists as it makes studying the subject harder and it puts off some people from becoming economists. The problem stems from the fact that many authors in economics are indeed not English, their mother tongue is not English, and so they write in English as a second language and not a first language, they have learnt English for a limited time and their ability in it is limited, also the other point is that economists don’t want to keep writing about decision making but they have to so they write about decision making but re phrase it so they don’t use words like decisions all the time as this would make their essay rather repetitive, boring and not good, but rest assured they are meaning decisions even though it is not explicitly stated. One other thing is that mathematical models put people off but economics cam be studied just as effectively using verbal descriptive methods so descriptive essays can be read instead of mathematical papers without any loss in value.

Economics has its own language in the sense that it uses exotic sounding terms like credible threats, regret theory, expected utility theory, dominated strategy, capital deepening, capital intensity, certainty equivalent, choke price, collusion, conglomerate, cyclical unemployment, sales tax, speculative demand, spot market, future market, stock, strip financing, structural unemployment, stylised facts, sunk costs, supply,

Capital deepening- an increase in capital intensity

Capital intensity- the amount of capital input per labour input

Certainty equivalent- the amount (money or utility) a person is willing to receive in order to be indifferent between taking a gamble and accepting the sure thing

Choke price- the lowest quantity demanded for which the price is zero

Collusion- where parties refrain from partaking in an activity they usually would in order to reduce competition and raise prices

Conglomerate- a firm operating in several industries

Cournot duopoly- a pair of firms that split the market

Cyclical unemployment- when the unemployment rate moves in the opposite way to the gdp growth rate, for example the gdp growth rate is high and the unemployment rate is low

Sales tax- a tax levied on the sale of a good or service which is usually proportional to the price of the good or service

Sharpe ratio- it is the mean minus the risk free rate multiplied by the standard deviation for an asset portfolio. The nyse has a sharpe ratio of .3 to .4. standard deviation measures risk and mean measures return. Higher sharpe ratios are more desirable.

Speculative demand- the speculative demand for money is inversely related to the interest rate

Spot market- a market where good or services are traded for immediate delivery

Future market- a market where goods and services are traded for delivery in the future

Stock- a portion of ownership in a company that entitles the own to the companies profits (aka equity or share)

Strip financing- this is corporate finance where securities are sold in a stapled package and cannot be sold separately. This is useful because people with the same interest are all in one group so it is less likely there are conflicts of interest.

Structural unemployment- a form of unemployment that results from there being zero demand for workers that are available

Stylised facts- real world observations that have been made in so many contexts that they are considered economic truths, these are essential for theory building as the theory must fit the stylised facts, but stylised facts or of no use in economic history because context is required to be specific.

Irrevocable- incapable of being revoked

Sunk costs- costs that are not able to be revoked and should not influence current decisions

Supply- the total quantity of a good or service that is available at a particular price

Demand- the quantity of a good or service that a consumer is both willing and able to purchase at a particular price