Wednesday, February 27, 2008

Check Out This Weeks Free Will

On this week's Free Will on Bloggingheads, Will Wilkinson discusses behavioral economics with Dan Ariely, author of Predictably Irrational. It is an interesting discussion, and it addresses some topics that I think are somewhat confusing for those who aren't economic-minded.

One topic (among many others) they mentioned are the limitations to the economic axioms. One being full information.

Dan Says:

"When we design things like healthcare policies and insurance policies and so on, we almost seem to assume that people can do all these computations instantly and basically be infalable."


He goes on to illustrate by asking Will to compute the optimal mortgage payment he should take on. Will responds with the quick and dirty computation of a mortgage should be no more than 1/3 of your annual income. Which Dan says is exactly the problem. People simply can't make the actual computation that would include the time value of money, opportunity costs and so on, and they are forced to use a rule of thumb.


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