Living Economics

Advantage vs Behavior
Theory of advantage is not theory of behavior.

Marginal thinking purports to predict or explain economic behavior. But people often do not behave as marginal optimizers. Optimization at the margin can be better understood as a theory of advantage rather than a theory of behavior (Boulding).

For example, economic theory advises people to ignore sunk cost1 because it is irrecoverable. Instead, people should focus on comparing marginal benefit with marginal cost. But real people cannot forget what goes on in the past and try hard to salvage sunk cost.

Admitting that people sometimes do not behave as marginal optimizers does not mean that behavior is unpredictable. It simply means that optimization models must take into account such departures from marginal rules. It also means that departures from marginal principles should not be regarded as irrational or anomalous.

Marginal optimization principles are still applicable for efficient resource allocation. But they should be applied subject to the constraints of actual human tendencies. To insist that people should behave as marginal optimizers is to concede the whole field of consumer behavior research to the marketing profession.

Note:
  1. Cost that cannot be recovered or diverted towards alternative uses.
  2. Cost that cannot be recovered or diverted towards alternative uses.
References:
  • Boulding, K. The Skills of the Economist. Cleveland: Howard Alden. 1958.
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