Economics and introspection

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Economics and introspection—from misunderstandings to reality.

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Faculty of Social Sciences at the University of Trent; October 13, 2018. “Common Mistakes in Daily Decisions — from Misunderstandings to Reality”. Conference by Magalì Fia.

Obstinacy in decisions

Through the study of economics, we can make more profitable decisions.

When applied to individual choices, it helps to avoid misunderstandings, and bring us back to reality.

It helps not to make stubborn choices, and it highlights when we are deciding without evaluating costs and benefits.

Stubborn investment choices are likely in business; let’s make an example. I am an entrepreneur and I have invested a sizeable amount of money in producing a new car, which I will sell at a competitive price. I have already invested 90%, of my money, and I’d have to invest another 10%. But I hear that a competitor just put on sale another car with similar features at a much better price — a price that’s too low to compete with.

What will I do? I could complete my investment by spending the remaining 10% money as planned. In doing that, I should consider that I risk bankruptcy; in fact, my competitor makes lower prices for a similar product. Alternatively, I can choose a different strategy to invest the money I have left. For example, I can adapt the production line to another kind of product. If I pick the first strategy because “I have already invested 90% of my money” and insist on carrying out the investment, I am not evaluating the costs and benefits of my decision.

Individual choices to solve problems

Let’s now see how normal people make stubborn, inconvenient choices.

I bought a movie ticket for Friday night. On Friday afternoon, a friend of mine invites me to a show. I’d rather go with him to the theater than alone to the movies. What do I do? Since I have spent money to buy the ticket — which is not refundable — I want to avoid wasting my investment. I decide then to go alone to the movies.

But if I don’t like to go to the movies alone, why carry on a “bankruptcy” investment? I could spend better my time going to the theater and look at a show I like together with a friend. I give up this opportunity for obstinacy’s sake.

Economics and introspection together (introspective economy) highlight errors of assessment, and the illusion of having made the right choice.

In the last example, is my goal to go to the movies, or is it to spend my spare time with pleasure? The movies are only a means. Going to the movies would be unsatisfactory because I don’t like it anymore.

Magalì Fia

This paper refers to the economic concept of “sunk cost” – In psychology’s applications, there is a concept of “sunk cost fallacy” –

In this paper, I made a reworking of this concept.