Read the article “Economists discover miracle hangover cure: drink less”, and write an essay to address the following questions

• What are the basic assumptions that economists take as given when building their models, as mentioned in the article? Why are these assumptions important to economists developing theory and building models? Why is it important that people using the models developed by economists know and understand these assumptions?
• What is the opportunity cost to Chris of going home to plan PlayStation?
• Jessica, the journalist, argues, ‘Hangovers are only possible because ordinary humans often do not fit the model of rational individuals prescribed by economists’. What reasons does she give for this? Is it necessarily true?
• According to economists, how do rational people choose between alternatives, and how do they explain changes in choices? Can you find an example to illustrate this in the article?
• Is the article a case of ‘It might work in theory, but it doesn’t work in practice’?

Must not exceed 1000 words
It must be submitted typed, one-sided, and double-spaced on white A4 paper.
Criteria for marking:

1. Coherence of argument:
Having a minimum of three (3) APA references (books or articles from reputable publishers): 1%
Relevance to the topic: 2%
Logical consistency: 3%
2. Originality: 2%
3. Presentation: 2%

Answer

Introduction

Kőszegi and Szeidl (2012) pointed out that people have the tendency to focus excessively on some attributes of the options at their disposal and thus put more weight on such attributes. In an example by Schkade and Kahneman (1998, cited in Kőszegi and Szeidl, 2012), an individual making a comparison between California and the Midwest in regards to their quality of life may place more focus on climate than many other factors and hence more likely believe that California is a relatively better place to live. Moreover, a purchaser making a decision on whether to purchase an unhealthy commodity may have much of his focus on its price as opposed to health concerns and hence be more price elastic than he responds to information on nutritional value (Abaluck, 2011). Building on evidence from the article “Economist Discovers Miracle Hangover Cure: Drink Less” by Irvine (2009), this paper explores the objectives and/or decisions of economic agents and the underlying assumptions when such agents (who are assumed to be rational) make economic decisions. The paper notes that the rationality assumption is based on four axioms that guide economic choices.

Modeling choices among economic agents

Whether individuals are behaving in a rational or irrational manner is an issue of significant concern to economists. Rulleau and Dachary-Bernard (2012) noted two methods used in modeling the decision-making process among economic agents, which are the standard economic theory and the standard economic valuation. These two are based on choice and classical preference approaches, respectively. The former method is concerned with choice behavior among decision makers, i.e. revealed preference, while the latter makes the assumption that economic agents have preferences that dictate their possible choices. This paper relies on discrete choice experiments (DCE) belonging to the latter typology, which assumes that individuals’ behaviors are rational. This approach depends on limiting assumptions regarding the behavior of individuals, in the absence of which the utility function will be inestimable, as well as well-behaved indifference curves that are difficult to design (Rulleau and Dachary-Bernard, 2012). Full rationality, or simply rationality, implies that individuals have full information about the available decision alternatives, the odds of their outcomes, and their consequences, and no reasoning limitations exist while digesting this information. Individuals make decisions based on cost-benefit evaluation and opt for an alternative that gives the highest level of expected utility (McGee & Warms, 2013). Chris the economist, for example, weighed the economic costs and benefits (including opportunity costs, e.g. missing playing the PlayStation as well as forfeiting the pleasure of cataloging his stamp collections) of drinking an extra glass of beer and saw the economic justification of not taking an extra beer (Irvine, 2009). To him, it was irrational and therefore less satisfactory to take more beer and compromise the execution of other activities the day that was to follow.

From the decision-making literature, specifically the literature on rationality, several rationality axioms have been deduced. One of the axioms is monotonicity, which implies that “more is preferred to less” (Rulleau and Dachary-Bernard, 2012). Chris contemplated whether to deny himself the pleasure of an extra glass of beer or not. In a similar manner, a young journalist drank much wine until she missed her friends’ barbecue (Irvine, 2009). These two scenarios confirm that more and more of a good is desirable as it will cause more utility. In theory, another economic axiom pertaining to the rationality assumption is the transitivity axiom. According to this axiom, if an economic agent prefers a basket of goods, say A to B but prefers B to C, then it should be such that the same person prefers A to C. If Chris chooses to sacrifice more drinking for playing PlayStation and assumes further that the next day he foregoes this game so as to catalog his stamp collection, it will be irrational if, in the next instance, he behaves inconsistently, such as drinking to the extent that a hangover deters him from playing the PlayStation.

Another axiom is that of completeness, which maintains that people’s preferences between any two possible choices are well-defined. For example, if an individual faces two baskets A and B to choose from, it should be such that this individual is able to rank “A” above “B” or “B” above “A”. Ideally, it should be possible for a consumer to distinguish in terms of utility between two baskets. Chris was able to rank playing a PlayStation and other alternatives, such as cataloging his stamp collection, above extra drinking and ensuing hangovers (Irvine, 2009). Probably the final axiom is the continuity axiom, according to which economic agents (mostly consumers in the context of this paper) take into consideration all attributes of available choices before making a preference decision (Rulleau and Dachary-Bernard, 2012). Chris must have relied on the continuity axiom when he assessed the attributes associated with drinking, such as the monetary cost of the beer, and the cost of being unwell the next day due to a hangover, among others, when he suspended the third student. On the other hand, the young journalist behaved contrary to the continuity axiom, which is why she failed to consider attending her friend’s barbecue while making a drinking decision; she missed it due to hangovers and eventually regrets.

Conclusion

The paper has noted that the rationality assumption is built on at least four axioms, i.e., monotonicity, continuity, completeness, and transitivity. The rationality assumption, and particularly these axioms, are important is estimating utility functions as well as developing well-behaved indifference curves. The paper also notes that the opportunity cost for Chris to play the PlayStation is pleasure derived from ordering and drinking a third schooner of beer. In general, the author of this paper argues that though these economic arguments may seem of much theoretical relevance, they are often seen to have influence in the real world.

 

Reference

Abaluck, J. (2011). What would we eat if we knew more: The implications of a large-scale change in nutrition labeling. Massachusetts Institute of Technology Working Paper.

Kőszegi, B., & Szeidl, A. (2012). A model of focusing in economic choice. The Quarterly journal of economics, 128(1), 53-104.

McGee, R. J., & Warms, R. L. (Eds.). (2013). Theory in social and cultural anthropology: An encyclopedia. Sage Publications.

Rulleau, B., & Dachary-Bernard, J. (2012). Preferences, rational choices and economic valuation: Some empirical tests. The Journal of Socio-Economics, 41(2), 198-206.