In fits & starts I’ve been reading Albert O. Hirschman’s “Exit, Voice and Loyalty”. For a while I kept part of a bookmark on an early section to remind me to comment on it, and that’s what this is. One of the topics in the book is how economic actors do not always maximize and may often exhibit “slack”. He gets into a discussion of theories of irrational behavior in economics, which are still the hot new thing four decades later. What’s surprising is his citation of Gary Becker as one of the theorists who worked with irrationality, since Becker is famous for applying “economic imperialism” of rational choice theory to areas traditionally considered part of sociology (crime, families, etc). The citation is to the paper with the title of this post, which JSTOR tries to lock away from the unwashed masses but a kindly soul has placed here. A lot of it involves mathematical statements about overlapping areas of graphed curves, so you may prefer Micha Ghertner’s classic Alchian-inspired post What Does The Free Market Require?
July 18, 2010
Advertisements
July 18, 2010 at 7:09 am
It’s perfectly rational not to optimise perfectly, or even as much as possible, given the costs of evaluating a change and the way that curves describing the gains drop off as they move away from an optimum. The thing is, the opportunity costs of being sub-optimum are typically of the order of the square of the “distance” from the optimum, so they are quite small when that is small – but the costs of evaluation typically are about the same for each option tested. That means that, in many cases, near enough is good enough (not when a market niche is winner take all – but then it also makes sense to diversify into other areas for which that is not true).
For the technically minded, this area has been investigated using “dynamic programming” on “unimodal curves”, and the optimal search strategy turns out to involve testing based on choosing test options using the “golden ratio” (you might want to use the terms I have put in quotation marks for any internet searches).
July 18, 2010 at 4:18 pm
P.M. Lawrence isn’t that first sentence misleading? It seems like what you’re saying is already grounded in optimization strategies, but you’re saying it in a technically refined way.
Part of optimization is optimizing how much time and energy one puts into optimization, I don’t think that’s ever been a revelation (although like everything it seems to me to gets fuzzy and ultimately intuition grounded the closer you look -how do you determine the time spent on third order optimization planning (how much time you’ll spend determining how much time you should take determining how much time you should take to formulate an optimization strategy? You’ll use intuition/instinct/coin toss for that one, I suspect).
July 19, 2010 at 11:16 pm
[…] disagrees with Gary Becker Posted by teageegeepea under Uncategorized Leave a Comment Recently I cited a Gary Becker paper showing that many microeconomic theories remain valid even if […]
May 4, 2014 at 1:40 pm
[…] Just learned of his passing via Mankiw (via Eli Dourado’s twitter feed). He’s most closely associated with “economic imperialism”, which might be summed up as applying economics to subject matter normally investigated by sociology. Plenty of pop “economics of everyday life” has followed afterward, with his clearest acolyte being Steven “Freakonomics” Levitt. I cited (or re-cited, since Albert O. Hirschman’s citation is what alerted me) a classic Becker paper on the economics of irrational agents here. […]