There’s some deep irony to the fact that a lot of economic theory operates under the idea that humans operate rationally: this statement is in-and-of-itself irrational.
We should be spreading the “proven” economic insights across the distribution of people that act rationally when faced with economic decisions. Here’s a series of questions that prove how non-sensical of an assumption this is:
What percentage of people read both the price and the weight of items they buy at the grocery store?
What percentage of people can do (or at least approximate) division with 2-4 digit numbers, e.g. 4.20/16 = ?
What percentage of those people can also quickly (or approximately) convert between units, e.g. between grams and ounces?
What percentage of those people can recognize that applying the above math gives an item’s cost per unit of weight?
What percentage of those people recognize that this is the way to fairly compare the price of two products?
What percentage of those people actually do all of the above?
Notice that each subsequent question reduces the pool more and more. Yet this is the bare minimum to being a “rational economic actor”. On top of that, we have to evaluate subjective differences between products that can be compared in this way, e.g. brand, quality, nutritional value, BAC%, expiration date, your cravings or emotional state that day, etc.
This tall, ever-growing list of requirements makes it impossible to truly be a rational economic actor. Furthermore, the subjective nature of the latter items is ripe for exploitation and manipulation by anyone who wants to sway the opinion of a consumer in a particular direction: advertisers, health gurus, brand ambassadors, self-help guides, etc.
It doesn’t stop at the grocery store either, as you can imagine. It applies when you’re buying headphones on Amazon, fruit at a farmers’ market, a meal at a restaurant. Tons of money can be made when you have an information advantage over your consumer: the harder it is for us to answer the question of “Is this the best bang for my buck?” the more money can be squeezed out of us.
We can “outsource” the information gathering to others, but this is both a fuzzy and incomplete approach. Fundamentally, to be a rational economic actor, you have to be privy to all of the information available about the thing you’re purchasing, which is a task rivaling Sisyphus’ rock.
This same is noted by the “Efficient Market Hypothesis” in the world of finance: it claims that market prices adjust rapidly in response to new public information. And yet, while processed meat is definitively proven to cause cancer, bacon is still as expensive as ever. A rational economic actor would have no interest in cancer…
Examples of Irrationomics
Here are some more fun economic decisions that make absolutely no sense:
- Nonchalantly spending \$50 on a meal, yet meticulously deciding between two shirts that cost \$8 or \$10.
The former is one of three meals you have to eat pretty much every day of your life, while the other is a clothing item you’ll wear dozens and dozens of times over the next year.
- Paying exorbitant prices for food delivery.
Given that delivery apps add fees, don’t include tips, and even charge higher prices for the same menu items vs. the restaurant you’re ordering from, the price almost always doubles and can sometimes even triple. I’ve seen a \$9 burrito somehow end up costing \$25. I’m willing to bet many people aren’t making that much per hour at their actual job (which puts a dollar value on their time by definition), yet spend it haphazardly on a cold burrito and stale tortilla chips that get there 45 minutes after your impulsivity has worn off and leave you shamefully full.
Here’s a fun one that applies in the reverse direction:
- Driving extra distances to save money on gas.
Let’s assume we drove an extra 3mi to save \$0.05/gal. If we take into account vehicle wear-and-tear (which the IRS approximates at \$0.585/mi), the amount of time that extra 3mi takes (which we’ll call a 10-minute round trip through city traffic), and the cost of your time (which we’ll call minimum wage for the sake of argument), that comes out to:
(6mi * $0.585/mi) + 10min * ($7.25/60min) = $4.72
In other words, it cost you $4.72 to save $0.60 on gas (assuming a 12-gallon tank). Hell, let’s assume for the sake of argument that your time is worthless and you use the IRS charity rate: that’s still $0.84 of wear-and-tear on your car.
Not worth it, yet I’m guilty of it all the time…
Hopefully I’ve convinced you that more often than not, we’re not going to make the best economic choices. There’s not much we can do about it besides try to inform ourselves, but not only is there information overload, it’s also constantly changing (thank you, science!).
And since sellers typically have information gain over buyers (especially at scale, since there’s one seller to many buyers), we’re probably just screwed.