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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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Rational Spending Rule : To be rational or not

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Rational spending rule, despite the abstract derivation, can be used to make sense of several real world phenomenon.                                                 Some cities have grown vertically while the rest have grown horizontally. To use popular analogy, it can be described as the lift vs the car model. The answers can be sought in utility analysis. Cities which are short of space find it difficult to accommodate people close to the city center. The cost of land being high deter people and either move them to the margins or compel to look at alternatives. Similar is the case with commercial space in land starved locations. An analysis would probably reveal a greater spending on alternative goods than housing.   It need not necessarily be for upper income groups alone. Experts have often wondered on the increased consumption of consumer electronics or durable goods in poorer localities. Dharavi in Mumbai may not have enough space to provide basic housing and sanita
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Unlimited all the way- Diminishing Marginal Utility in Practice?

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As one walks in to a five star hotel, we find ourselves inclined to try Buffet Meals for a fixed price. Andhra restaurants have become popular for offering unlimited meals. As we visit few amusement parks, we find they charge a fixed entrance fee and let us enjoy unlimited rides. Mobile service providers woo customers by offering unlimited SMS per day at a flat fee. Bangalore Metropolitan Transport Corporation (BMTC) lures us to try its buses with a day pass (unlimited rides for a flat fee for the calendar day). Further for ages we have had the concept of Bus passes for students and frequent users as also the Suburban rail passes in Mumbai and other cities in India.   Internet service providers offer unlimited browsing per month for a flat fee. Unlimited rides in public transports, enjoy unlimited SMS, telephone calls, internet usage or even unlimited cuisine sound attractive and are part and parcel of our daily economic life. Yet step back and wonder what logic prevails here. Th
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Corner or convex solutions –Mahabharata to Jinnah to Anna Hazare

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Indifference analysis enables locating the optimal consumption bundle of typical consumer. Corner solutions are exception to law of equi-marginal utility. But do they occur in practice? The answer is yes if one is prepared to go beyond the text book. Few examples are in order. Corner solutions refer to the situation wherein the consumer is happy when he has all of one good and none of the other. He either wants all of it or none at all. Take the example of Mahabharata. Pandavas and Kauravas fight for the land of Hastinapura.   Bheeshma’s solution of division of the territory did not solve the matters but postponed it. The game of dice and Pandava’s consequent exile resulted in Duryodhana ruling over the Indraprastha hitherto ruled by the Pandavas.   Post their return from exile, there were multiple options. The whole kingdom could go either to Pandavas or to Kauravas or a division could happen which could allot varying proportions to the both the parties. Bheeshma’s formula r
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B-School Survival Dilemma

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B-Schools mushrooming all over the place have created their own set of problems. While normally B-Schools entrepreneurs attribute to market conditions for their plight, I argue that it might not be the case. Blaming the market is simplistic and to a good extents the entrepreneurs have to the share of their blame. More on this here
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Blockbuster Populism

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Often we see populist policies getting all round support from political parties. There are number of instances wherein pieces of legislation perceived to be good economics get defeated or withdrawn. Is it merely perception of something else at work. I've my own take on this. We need to understand this apparent paradox through Game Theory and Prisoner's Dilemma. More on this here
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