Some Rambling Thoughts by Fabio:

In economics, we are taught to think of people as utility maximizers.
However, marketers tend to be much more "cognitive" in their approach to
human behavior. People buy stuff as a result of a very contextual decision
process. In the marketing world, decisions to buy stuff are triggered by
cost and percieved benefits, what other people are buying and what people
remember about a product (as opposed to it's actual properties). Marketers
also seem to take "bounded rationality" much more seriously than
economists. A product doesn't get bought just because it has the lowest
price or the best performance - it has to compete for limited space in the
consumer's mind. That's why manufaturers pay for shelf space in stores -
low price is often not enough. 

In principle, the cognitive approach is not incompatible with utility
theory. You could easily argue that limited memory, habit formation and
trendiness can be derived from a utility maximization approach (a la
Becker or even Akerlof). However, it seems more simple to postulate that
people have a set of rules that they apply to some classes of economic
behavior.

If you take the "cognitive" approach more seriously, then you might come
to following conclusions:

- Some behavior is utility maximizing in the regular sense if there are
heavy costs to following "bad" rules. Buying homes, for example, would
probably be pretty rational. Purchase of groceries probably is done with a
bunch of non-optimizing rules. (this argument follows bryan's)

- The outcome of many types social interactions should not be seen as an
accurate refelection of preferences and incentives, unless the persons
involved understand the costs of the their actions pretty well. The
outcome should be seen as the state of a system where you have lots of
interacting individuals applying certain rules. This is a kind of model I
rarely see in economics (although there are well known examples, but it's
not typical).

- A lot game theory is silly. When there is uncertainty or imperfect
information, it seems more plausible that people will apply certain rules
instead of figuring out insane esoteric equilibrium conditions.

- Some social systems seem to contain a mixture of "rational" and
"cognitive" actors. Elections, for example, have lots of rule based people
(voters) and a small, but crucial, number of rational actors
(politicians). Voters apply all sorts of rules to voting (pro-incumbent,
for ex) that are independent of utility maximizing, while candidates seem
wickedly rational because they have a lot more at stake than a single
voter.

- Economists need to expand the repertoire of explanations. Economists
should learn how to model rule-based behaviors and interactions with the
same ease as they can calculate a Langrangian multiplier. Econ 101 should
start with a speech saying how people sometimes apply rules to economic
behavior and at other times they act like classical utility maximizers.
Students will then learn marginal analysis and models that embody rules
based behaviors.

So there you have it. Some rambling thoughts...

Fabio


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