Your right, thank you. (I saw your post after I posted my last post.)

Anti-Economist: Economists believe everyone maximizes their welfare, but they give charity. People must be irrational.
Economist: People derive utility from giving to charity. It makes them feel better.

Anti-Economist: But people don’t save for retirement to the correct degree.
Economists: Many peple discount the future more heavily that you or I would like, but that is their preference. We don’t make normative judgements about people’s preferences, we just try to explain their behavior.

Anti-Economist: But a fat person who keeps eating ice cream. They would be better off giving up ice cream and living longer. Eating ice cream is irrational.
Economist: They really, really like ice cream.
Anti-Eonomist: But they are objectively better off living longer ,we need to ban ice cream.
Economist: I don’t think objectively means what you think it does. Maybe we should ban ice cream, that is a political opinion. But if we do, it is not because eating ice cream is “irrational” it is because we decided that the ratinal actions of other people to eat ice cream need to be stopped because we beleive is it for their own good.

Here is a test for you. Bob drives to the intersction and turns right beliving that is the best way to his destination. In reality, his destination was to the left, and he gets lost. Was his decision to turn right rational? (Get this wrong and I won’t be posting back.)(But don’t get it wrong on purpose to stop me, even though that might be rational.)

Come out of the theory ether and look at the facts of the case, for god’s sake, or just close your door because no one wants to see you when you’re doing THAT!

Read the case and you’ll see that the application of ED for this particular development is in violation of the New York State Constitution. This is a continuation of the persistent violations perpetrated on landowners by the Urban Development Corporation, which earned such a bad name it now goes by the Empire State Development Corporation.

Um, yes. Works wonderful *in theory* and less well *in actuality*. Which is what I explained, before. The problem, of curse, is that the theories all start with the idea that people were rational (were always trying to choose the action that is best according to preferences and constraints, or, if you monetize this, getting the highest value). Then, when any idiot with eyes could see that people often do things that don’t maximize what would objectively be the best course of action for them, the idea that we were working with individuals imperfect knowledge and subjective preferences became widespread. Fair enough. Of course, we could look around and see that people often don’t choose courses of action that would maximize their own individual preferences- so they’re being rationally ignorant. Or sometimes people have the knowledge, and still chose something that doesn’t match their preferences. Um- they value their misery! And they do something that doesn’t gain anything. They value their altruism! And… they do inconsistent things. They value the (millisecond) in not making a decision!

In short, the theory has been modified so many times to match the real world that it explains nothing, except for a continuing attempt to explain everything in terms of what the person actually preferred, instead of realizing that people are hardwired to do stupid things sometimes.

BTW- nice insult to behavioral economists! How’s this for a conversation:

Beahvioral Economist: Here’s my new paper, with an extensive study over 5 years involving the way 10,000 people actually made decisions.

road2serfdom: Well, that’s fascinating in practice, but how does it work in theory?

loki13: BTW,
Under the wonderful reasoning of road2serfdom, everything everyone does, ever, is rational.
Did you vote? Rational. You didn’t vote? Rational. You turned left today? Rational. You turned right? Rational. You accepted $8 for your widget when you just turned down $10 two minutes ago? Rational. Everything is rational because *otherwise you wouldn’t have done it*…. clearly you either priced it correctly, or you rationally remained ignorant of what you needed to know, or you chose to save time by making a poor decision, or you value being miserable, or…..
It’s the theory of everything, and it explains nothing.

Your beginnning to understand. Yes, if it was not rational they would not have done it. Saying a person’s actions was irrational is giving up trying to explain why they did it. Your are basically saying they had no reason for doing what they did. Economics has to allow people any preference set. We don’t say someone is irrational because we don’t agree with how they value things. Behavioral economists do that often, but not economists.

Under the wonderful reasoning of road2serfdom, everything everyone does, ever, is rational.

Did you vote? Rational. You didn’t vote? Rational. You turned left today? Rational. You turned right? Rational. You accepted $8 for your widget when you just turned down $10 two minutes ago? Rational. Everything is rational because *otherwise you wouldn’t have done it*…. clearly you either priced it correctly, or you rationally remained ignorant of what you needed to know, or you chose to save time by making a poor decision, or you value being miserable, or…..

It’s the theory of everything, and it explains nothing.

1. I don’t believe there are *any* rational actors. I’m much more of a fan of behavioral economics (aka, watching what people actually do, instead of positing how they should act). However, most of our models presuppose that people are acting rationally. It started with the assumption (classical economics) that people were rational actors (perfect information, time to make the decision) to make the models work. Now, of course, there is an attempt to collapse what we observe into further digressions about how choices are “rational” (reasonable) by building in more assumptions about the ephemeral values we gain from some transactions when a much better explanation is that… well, we’re not hard-wired to be rational. Unfortunately, people like you keep trying to plug real-world evidence into your a priori theories.

2. There is a more interesting question about whether, in aggregate, we can assume rationality.

3. Finally, Doc, you completely misunderstand what I wrote. Perhaps I wrote it too quick. I like how you chose the first post instead of the more detailed followup. Please continue to pick nits by looking at earlier, quicker posts instead of what I wrote directly above your post:

A values X at $5.
B values X at $10.
Court assigns X to A.
A then values X at $11 (endowment effect), even though *no increase in value to him has occured except the assignment of the right*. B can no longer acquire X in what would have been a mutually beneficial exchange.
Absent this (psychological / non-rational) effect, B could offer A anything from $6 to $10 and both would have gained.

Notice- *A VALUES at” “B VALUES at”. Enjoy your selective misreading.

loki13: Then the person who is not estimating perfectly isn’t a rational actor.

A person who always estimates perfectly is very likely spending and so much time, money, an effort that he could increase his utility by spending less effort estimating and accepting being wrong sometimes. Information is costly, and people will choose the efficient level of information to obtain based on the importance of the decision and the opportunity cost of obtaining the information. Ever hear of rational ignorance? Economics? No? Not so much?

loki13:
Ummmmm…..We’re talking about economics, right? You do understand this, right? Modeling based on perfect information? No? Not so much?Then the person who is not estimating perfectly isn’t a rational actor. But their actions are understandable.

No, only some models are based on perfect information, we used them because they are easier to understand/use. Rational means they have reasons for what they do, that is all.

loki13: Allan,I only mean irrational from the sense that it is not an economically rational decision. For example, if you have a piece of property valued at $10, and someone offers you $15 (let’s ignore transaction costs, moving etc. for now) then standard models say you should take the $15.

NO! NO! NO! NO! NO!
How many times do we have to say it!
Value is completely 100% subjective.
The models don’t say you should take it, they say you will take it if the value to YOU is less than the value of $15 to you. Thinking value is objective is one of the most common mistakes non economists make.

1) Value is completely up to the individual and its almost impossible to make a cardinal comparison between the two. You can make ordinal comparisons, for example, do you like $15 more than the land, or the land more than $15.

2) To an economist, rational means the person has reasons for what they did. It doesn’t mean they are operating according to the models. The models exist to try to predict/model human behavior; if they do behavior that the model doesn’t predict, then the model is wrong, not the person.

road2serfdom: Rational means a person weighs costs and benefits. That is all. It does not mean the person estimates perfectly

Ummmmm…..

We’re talking about economics, right? You do understand this, right? Modeling based on perfect information? No? Not so much?

Then the person who is not estimating perfectly isn’t a rational actor. But their actions are understandable.

Martinned: You misunderstand the nature of the experiment, probably because I didn’t explain it carefully enough..

I knew what you were trying to say, I just found it funny in that the way you worded it it was a perfect example of diminishing mariginal utility.

loki13: in response to road2serfdom,I am not even sure where to begin. I am using “rational” exaclt as I mean to; I think you are trying to substitue “understandable” or “reasonable” which is different.

Your the one substituting “reasonable”. Rational means a person weighs costs and benefits. That is all. It does not mean the person estimates perfectly. I fact, it is rational to make decisions witout wasting too much money obtaining information.

Allan expained perfectly why the students could behaivor could be rational. In addition, asking someone what they would accept is a lot different than observing market transactions. Offer the students $1000 cash on the spot, and how many of the “Not less than $2500″ responders would have taken it?

A values X at $5.
B values X at $10.
Court assigns X to A.
A then values X at $11

Right, so in that case A decided to charge what the market would bear, and that says whatever it says about Coase’s theorem. But that’s not really what we were talking about with the students and tickets, or at least not necessarily. There’s nothing irrational for an impecunious student to refuse to pay more than $170 for a ticket, yet, having won one, being unwilling to sell for less than $2400. Nor is the student necessarily trying to take advantage of someone. I would not buy a house for $500k because I couldn’t afford it. Maybe I’d pay 150k, because that’s the most I could reasonably afford. But if I won the house, I wouldn’t take $150k for it. I’d want the $500k if that’s what such homes were selling for, or even more if I didn’t want to go through the hassle of house-hunting and moving again.

Let me put it this way. Things are not valued in the abstract. The question is what I’d be willing to part with to get what. If I’m a student, giving up $2400 might mean having to drop out of college altogether, or sell my car and move back in with Mom & Dad or whatever. Pretty serious consequences. As much as I’d like to be at the game, it’s just too much. But if I WON the ticket, my usual expenses are still covered and I can enjoy the game without suffering. Sure, the extra money I could get selling it would be nice, but I don’t need it to stay out of the hole.

Suppose my house would only fetch $150k on the market, but it’s been in the family for generations and my old pets are buried in the back yard and I’ve spent many years fixing it up just right. Suppose I feel like my very heart is tied up in this house. Is it really irrational for me to refuse $150k, or even 1M? I don’t think so.

I don’t know what you do for a living, but suppose you are a teacher making $60k, and you’re willing to work for that much, and now suddenly there’s a shortage of teachers and other schools are bidding $100k for your services. Is there something wrong with taking the $100k and refusing the $60k? I don’t see it. The value you place on your time is not unrelated to what you can get for it.

I’ve worked as hard as I can on this and my wife is getting annoyed. Gotta go.

Um, no- you miss the point entirely. Let me simplify it for you.

A values X at $5.
B values X at $10.

Court assigns X to A.
A then values X at $11 (endowment effect), even though *no increase in value to him has occured except the assignment of the right*. B can no longer acquire X in what would have been a mutually beneficial exchange.

Absent this (psychological / non-rational) effect, B could offer A anything from $6 to $10 and both would have gained.

Nick

It’s not idiotic. If you know about Coase, think about the initial assignment of rights. If the rights are in equilibrium, then the initial assignment of rights (by, say, a court) can make a huge difference. Let’s say the court assigns it to the person who values it less (and will make less of a productive economic use of it). Normally, after the decision, the loser could bargain for the rights. The endowment effect, however, will cause the winner of the rights to overvalue what they have, increasing transaction costs and making it likely they will chose to retain the right. Which is unfortunate.

I am not even sure where to begin. I am using “rational” exaclt as I mean to; I think you are trying to substitue “understandable” or “reasonable” which is different. My only point is that people don’t behave rationally in an economic sense; in addition to common effects (endowment effect, wealth effect) we get other problems, the simplest to understand is that people can’t often measure (or appropriately price) the future costs/benefits of events’ to give you an easy example, ask someone (especially a teenager) who was just dumped how bad they feel (the cost) and how long that feeling will last. They are likely to overestimate both how badly they feel and how long that feeling will last (set point of happiness, which has a real-world impact when calculating hedonic damages in litigation).

Anyway, there is a problem with people behaving in an economically rational manner. While you can certainly ascribe a value (cost) to “the view that I get from this property” the fallacy is that the person will overvalue the view that they have now and undervalue what they could acquire in the future.

But people aren’t economically rational. It’s funny, to me, that libertarians love to assume this except when it comes to property rights, and then we just have to accept their irrationality.

Posing as ticket scalpers, they probed those who had not won a ticket for the highest amount they would pay to buy one and received an average answer of $170. When they probed the students who had won a ticket for the lowest amount they would sell, they received an average of about $2,400. This showed that students who had won the tickets placed a value on the same tickets roughly fourteen times as high as those who had not won the tickets.

…students should have viewed these tickets the same way.

How much I’m willing to pay depends not only on how much I’d like a ticket but also on how big a hole the price will put in my finances. Most likely the typical student did not have $2400 to pay for a ticket, but once in possession of one, wouldn’t let it go easily. Analogy: If I’m dirt broke, I’m not going to pay $5k for a diamond ring for my girlfriend, even if it’s marked down from $10k. But give me the ring for free, and I’m not going to part with it for $5k or $10, I’m going to give it to her.

Have I misunderstood something about this experiment and its interpretation, or is it as idiotic as it appears?

road2serfdom: Martinned:Diminishing Marginal Utility. His marginal value from the second mug is less than the value from the first that he owns.

You misunderstand the nature of the experiment, probably because I didn’t explain it carefully enough. Here’s another one:

In 1994, Dan Ariely and Ziv Carmon performed an experiment at Duke University which showed the endowment effect using a singular product, for which conventional substitution effects are not applicable. Duke University has a very small basketball stadium and the number of available tickets is much smaller than the number of people who want them, so the university has developed a complicated selection process for these tickets that is now a tradition. Roughly one week before a game, fans begin pitching tents in the grass in front of the stadium. At random intervals a university official sounds an air-horn which requires that the fans check in with the basketball authority. Anyone who doesn’t check in within five minutes is cut from the waiting list. At certain more important games, even those who remain on the list until the bitter end aren’t guaranteed a ticket, only an entry in a raffle in which they may or may not receive a ticket. After a final four game, Carmon and Ariely called all the students on the list who had been in the raffle. Posing as ticket scalpers, they probed those who had not won a ticket for the highest amount they would pay to buy one and received an average answer of $170. When they probed the students who had won a ticket for the lowest amount they would sell, they received an average of about $2,400. This showed that students who had won the tickets placed a value on the same tickets roughly fourteen times as high as those who had not won the tickets.

Also when asked about the reasons for their decisions they presented different justifications for the amount. Those in a position to purchase tickets for $170 cited various other purchases they could make such as beer, food, music and clothes. Those in a position to sell a ticket cited school pride and their expectations of memories they could pass on to their children and grandchildren. In a rational sense (and according to traditional economic theory), neither the time they spent camping out to receive the tickets nor the experience of the game itself are dependent upon the outcome of the raffle and therefore students should have viewed these tickets the same way.[1] The endowment effect shown in this case may be an effect of cognitive dissonance. The time spent camping out, waiting for the chance to be in the raffle became worth about $24/day to the students who didn’t win the raffle, but was alternatively worth about $340/day to the students who won the raffle.

The endowment effect is a wonderful thing.

loki13: Allan,I only mean irrational from the sense that it is not an economically rational decision. For example, if you have a piece of property valued at $10, and someone offers you $15 (let’s ignore transaction costs, moving etc. for now) then standard models say you should take the $15. Perhaps we can factor in intangibles (such as your happiness from the land causes you to overvalue it). However, it is sometimes the case that will people will place value on things, especially property, far higher than what is “rational”. It’s not wrong- it’s human.

You are butchering the term “rational”. It does not mean what you think it means (as an economic term). There is nothing “irrational” about “happiness from the land” causing a person to value something more than the price other people recently traded a similar plot. As pointed out by Allan, the “market value” is just the price that two people recently traded; it has nothing to do with an individual’s valuation on their own similar piece of property. If a requirement for rationality was to value things equal to the market price there would be no consumer surplus or gains from trade.

Diminishing Marginal Utility. His marginal value from the second mug is less than the value from the first that he owns.

So I’m with the Austrians: non-mainstream but neoclassical. Value is not something that property objectively has; rather, “value” is foremost a verb. People value things. Individuals pursue their own individual goals and purposes according to their own individual valuations. Just because other properties like mine are selling for $50k does not mean there is anything irrational about my being unwilling to part with mine for $1M. In fact, even in the neoclassical mainstream, market prices settle to the intersection of supply and demand curves that are themselves the composites of many DIFFERENT individual supply and demand curves. Just because trade is taking place at the market price does not mean there’s anything irrational about the preferences of all those who aren’t buying or selling.

Tim:
I might correct this to say not just neoclassical economics, but ALL mainstream economics (of which Marxian economics is not a contributor)

Indeed. The distinction between value in use and value in trade is very old, and theoretically the former should be greater than the latter, since if it wasn’t, the rational actor would trade.

This is a separate issue from the endowment effect, which is what loki13 was talking about.

Mark N.:
That sort of claim is considerably outside the mainstream of neoclassical economic thought, which considers the market value (”economic worth”) of a commodity to correctly capture its value. It’s possible to distinguish between, say, exchange value and other kinds of value, but generally only Marxian economics does so.

I might correct this to say not just neoclassical economics, but ALL mainstream economics (of which Marxian economics is not a contributor)

Law Student:
The value in one’s property goes beyond its economic worth in most instances

That sort of claim is considerably outside the mainstream of neoclassical economic thought, which considers the market value (“economic worth”) of a commodity to correctly capture its value. It’s possible to distinguish between, say, exchange value and other kinds of value, but generally only Marxian economics does so.

I only mean irrational from the sense that it is not an economically rational decision. For example, if you have a piece of property valued at $10, and someone offers you $15 (let’s ignore transaction costs, moving etc. for now) then standard models say you should take the $15. Perhaps we can factor in intangibles (such as your happiness from the land causes you to overvalue it). However, it is sometimes the case that will people will place value on things, especially property, far higher than what is “rational”. It’s not wrong- it’s human.

This is neither to advance nor to denigrate the concept of eminent domain, but, rather, to explain why it is a concept so well-understood throughout history that it was even put into the Constitution. The fact that people such as law student (above) immediately go to “but it’s worth so much more that money” as their explanation is precisely why there is eminent domain; feel free to argue about whether its abused etc.

IOW, if we were all economically rational actors, we wouldn’t really need ED, would we?