Thursday, February 27, 2014

Cost, Choice, and Heuristics

James Buchanan defended two strong claims in his 1969 book Cost and Choice. The first is easy enough to grasp for students of economics: all costs are opportunity costs. The second made great sense as I read it, but becomes a little more slippery the more I think about it: cost is incurred at the time of the decision. Handing over a wad of cash or making scheduled payments is of importance to the accounting of it, but the accounting of it is not the deciding of it. Economists make a professional habit of studying choice; ledgers are a means to analysis, not an end of themselves.

But it's this "time of decision" that keeps tapping gently on my shoulder. Very rarely is it that folks walk into a contract opportunity innocent of prior beliefs. You know what you want to buy, and most of the time, you have a rough idea of what the price will be. I'd even go so far to say that most of the time, you've got an okay idea about what effects inflation and productivity improvements will have on the point estimate of the price as well as a reasonable confidence interval to allow for a bit of noise. My point here is that folks anticipate the terms of trade. Deviations from these heuristics in the interregnum from daydreaming to updating are uncomfortable. I think the term from psychology is "cognitive dissonance".

When cognitive dissonance happens in undisciplined settings (political beliefs, interpersonal relationships, eg), people can make excuses, pass the buck, justify, or dodge the question entirely. For pairwise bargaining, there is no avoiding the harsh reality of your beliefs being wrong. You can't justify your way around surge pricing. You can either swallow your discomfort, do without, or (as seems common enough) petition the legislature to force others to tell you comforting lies about the nature of the underlying scarcities inflicted by the whims of nature.

I don't necessarily have a problem with folks lying to themselves, but I do think it's obscene to force others to do their lying for them. That's much worse than non-euvoluntary.


  1. So is your critique of Buchanan that the cost is actually incurred before the time of decision, when heuristics are "invested in" so to speak?

    1. Sort of. I'm saying that decision isn't instantaneous. It moves from recognizing a want through an information-gathering process. Most of the time, this is comfortable and familiar. Occasionally it isn't.

    2. This is like the behavioral equivalent of a rational expectations response. People don't just incur costs at the moment of a decision. They spread the costs of a decision out over time, based on their expectations (rational or behavioral). One might even go so far to say that the decision itself is spread out over time, but I can imagine Buchanan replying that he's simply referring to the moment that the exchange is actually made.

    3. I'll have to re-read it, but I think he went out of his way to distinguish the decision from the exchange.

    4. Ah---yeah, then I'm definitely with you. There is no instant, for nearly everything that matters. Even with small, low transaction cost things like mobile apps or MP3s, human beings are not pure on the spot impulse decision makers.


Do you have suggestions on where we could find more examples of this phenomenon?