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Showing posts with the label Information asymmetry

Decision Making as Output and Bounded Rationality

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  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra
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Decision Making as Output and Bounded Rationality

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  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra
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The Rationality of Medieval Punishment Practices

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  It has been stated many times that economics is about behavior. Demand and supply are mere manifestations. Economics is concerned with how people take decisions under various circumstances. There is a positing about rationality in decision making. Economics assumes agents are rational when they make decisions. Implied is the agents are well aware of the cost benefit analysis when they exercise those choices. While the exercise of choices might seem irrational or weird to the observers, yet to the agents, there exists a certain calculations that would have gone into their choice. The behavioral economics contests this proposition, yet it is more about decisions under cognitive constraints or informational constraints. It is about boundaries to the rationality in terms of decision making. Therefore, behavioral economics talks about bounded rationality. Yet within these boundaries, there does exist a cost benefit analysis towards execution of preferences. Not evaluating every possible c
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Economics and Signalling: Beauty and Ownership of Durables

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  There is without doubt a fascination in many to look or appear beautiful or handsome. They want to score one up over their family members or friends or those in the social circle. There is no doubt an attraction towards spending on beauty products like cosmetics or dresses. There is further an attraction towards owning latest electronic gadgets, a keen inclination to own a car or at least a two wheeler, an innate desire to own house preferably in an upmarket belt, a tendency to possess and wear jewellery different from the rest. All these are instances which one observes around them in everyday life. To some it might be a necessity, to some it might be an aspiration, to others it might be fulfilment of desire to square up with their prospective rivals so as to speak. Yet in each of these actions or movements towards those actions, underlies a concept that is innate to economics. While as perceived from outside, economics might appear abstract, but as the explanation for these phenome
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Real Life Economics and Home Purchase Industry

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The past posts have delved on different instances wherein economics can explain the real life phenomenon. As noted earlier too, many instances we encounter often have an underlying economics angle to them whether consciously or subconsciously. To an economics graduate seeking to apply theories learnt during the course into real life, the posts offer a structured way of implementing the same. Yet many who might not have taken economics as a subject but still would have applying the concepts into their daily life thanks mainly to the life experience curve. The current post takes the past forward into understanding examples from the real estate, construction and the housing industry.   There are many factors that determine the demand function for purchase of a flat or a house. The hedonic attributes might vary from location to the size of flat or house, the built up area, the area available outside for aesthetic or utilitarian purposes, the price of the land, the neighbourhood, the di
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Information Assymetry, Diya and Wuhan Virus

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Economics assumes rational action by agents under perfect available information. Yet the cognitive constraints in gathering and processing information makes agents take decisions under uncertainty. Rationality thus is bounded by cognitive abilities of the agents. In real life, contrary to theory, bounded rationality is evident. It is not to suggest irrationality in decision making but each action by an economic agent is a rational action undertaken through a grasp of cost benefit dynamics under the existing constraints. Information asymmetry between agents and among agents necessitate different approach to decision making. The buyer knows something about herself which the seller does not know. This could have significant implications in industries like insurance and banking. Suppose a person has a certain disability or disease while going for insurance which he or she can hide the same. Alternatively someone is going for fire insurance with a hidden objective of setting house or
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