For behavioral economists, however, freedom has a cost, which is born by individuals who make bad choices, and by a society that feels obligated to help them. The decision of whether or not to protect individuals against their mistakes therefore presents a dilemma for behavioral economists. The economists of the Chicago school do not face that problem, because rational agents do not make mistakes.  For adherents of this school, freedom is free of charge. 

Thinking Fast and Slow page 412 by Daniel Kahneman.

I like this book.  In fact, I think it would make a great supplementary text for an experimental economics course.  Kahneman explains carefully and exhaustively why human beings should think carefully about the process of making decisions. He argues that human beings can be quite irrational  and this material is good to know especially if you want to make good decisions.

However, I do have a couple of quibbles:

1) The book is very long and I got really tired of reading over and over again why people make the wrong decision between two choices.  The examples made me feel like I was at the optometrist.  “Is this clearer or is this clearer?”  After a while you just don’t care anymore.

2) He goes on a bit of a rant against economists (note that economists are quite willing to give a psychologist a Nobel Prize in economics it they think the work is worthy) and the assumption of rational agents.  We understand the problem of this assumption BUT  and this is a big but,  rational agent models are still the best way to make initial predictions about market behaviour.  What doesn’t work at the individual level seems to sort itself out at the market level.

3)  Much of his policy implications just reinforce the economic idea that incentives matter.  For example, an opt out system for savings will generate more savings in total because people will just have the money taken from their pay cheque without any effort.  To the economist, the act of opting in is a transaction cost and the results make perfect sense.  If  it takes effort to start a savings program then less savings will occur. This doesn’t imply that the person is irrational.

Quibbles aside, this is a good read.

By Guest Blogger Paul Anglin

For students, and especially for business students preparing for a final exam in economics, final exam time is a time to be tested. You will be assessed, numbered and maybe found wanting. This posting aims to tell you that failure can be a good thing and to suggest how to make it better.

Our Guest Blogger BF continues

OK, back to the various costs of capital.  Remember we said that depreciation isn’t included in user cost because it doesn’t depend on how intensively the capital is used – it’s not a variable cost.  Depreciation, here, means the drop in the value of the capital which is strictly the result of the passage of time.  It’s what Keynes calls an involuntary loss, as opposed to the voluntary loss associated with using the capital.  Besides the passage of time, it can result from changes in market values of capital and from obsolescence.  Keynes includes these in his calculation of supplementary costs.