Dear Ananda (and Caplan),
The problem is actually much bigger than at first glance. A zero-cost
environment not only makes people demand more than they are willing pay
for!! ...most zero-cost environments are also zero-INFLUENCE environments
(surveys, elections, etc) - in such environments people will be rationally
irrational in determining their own (or others') needs and wants (and the
degree of both). I refer you to Bryan's literature on the subject of
rational irrationality, available on his website.
Only in the marked are people's irrational "passions" kept in check - by the
fact that they themselves will have to pay for any irrational deviations.
This is what Adam Smith recognized and that is why he was pro-rationality
("calculating" behaviour was at his time seen as a sin). What Smith (as I
read him) unfortunately did not realise was Why the market provoked rational
behaviour... or he would not have been pro-democracy, which (unfortunately)
promotes (rational) irrational behaviour (read Stephen Holmes: "the secret
story of self-interest" in J. Mansbridge: "Beyond Self Interest" for a
fascinating discussion of the enlightenment thinkers and their view of
self-interest - and rationality)
formally, the reward (R) from any decision (whether in the market, in
elections or lotteries, etc.) can be presented in this way:
R = pB - C + X,
where p = probability of affecting the outcome by this decision; B the
benefit if you affect the outcome; C = cost of your decicion (incl. cost of
deciding); and X = the (expressive) pleasure derived from your decison.
As you can clearly see, market decisions and elections are very different -
with respect to p! In market-decisions p = 1 (or very close: the store could
be closed, but you would still have to endure the cost of going there). This
"certainty" promotes instrumental behaviour focused on the outcome: B!! -
instrumental behaviour is governed by rationality, and any irrational
passions (X) have only minor influences (commercials can persuade you to
change between similar priced cigarette-brands because one is "cooler" than
the other - but they will not make you start smoking). Elections and surveys
(and most lotteries) on the other hand are governed by the fact that p = 0,
wherefore B (the result, could you influence the outcome) becomes
irrelevant, and all that matters is your expressive pleasure (X) from doing
one thing instead of the other (choosing the "good guy" over the "bad", or
wasting a dollar on the chance of becoming a millionaire instead of
contributing to charity). In such an environment irrationality is cost-less
and thus the norm rather than the exception!!!
Since most zero-cost environments are also zero-influence environments, the
problem you are facing is therefore not so much that of zero-cost leading to
infinite demand - but that of zero-influence leading to irrational
preferences (held with irrational degrees of certainty!!)
If I am wrong on this, I am sure Caplan will correct me
Jacob W. Braestrup
Denmark
-----Original Message-----
From: Bryan D Caplan [mailto:[EMAIL PROTECTED]]
Sent: 25. januar 2001 16:42
To: [EMAIL PROTECTED]
Subject: Re: Preference revelation
Ananda Gupta wrote:
>
> People say they want things. But when it comes time to bear the costs of
> having those things, they change their minds. That is, people's true
> preferences can be best discovered through observing their actions, not
> their words.
>
> Does anyone know of any formal economics literature having to do with the
> above proposition? Are there any articles considered classics (since that
> does seem to be a basic issue in economics)?
The classic is probably Milton Friedman's "Methodology of Positive
Economics" in *Essays in Positive Economics*. But note that few try to
provide much empirical evidence for this, probably for the simple reason
that what people say IS a rather good predictor of what they will do.
--
Prof. Bryan Caplan
Department of Economics George Mason University
http://www.bcaplan.com [EMAIL PROTECTED]
"[T]he power of instruction is seldom of much efficacy, except in
those happy dispositions where it is almost superfluous."
-- Edward Gibbon, *The Decline and Fall of the Roman Empire*
