Choices Matter

You must have heard of Scrooge in Charles Dickens’ ‘A Christmas Carol’. Scrooge was a greedy businessman who had no joy and love in his heart. So, he worked in his office even on the Christmas Eve. Had Scrooge went to celebrate Christmas, he would have had to buy gifts. Being ‘rational’ Scrooge chose not to. Why? Suppose Scrooge gave a gift worth Rs. 100 to a person, say A. But, A values the gift to Rs. 80. Scrooge in return might receive a gift that he values less than the price of the gift. Therefore, it leads to a loss in total utility. Scrooge could have given Rs. 100 in cash as a gift but he chose not to, because he won’t be as satisfied, though better off than the previous case. Scrooge’s rational thinking led to him having no place in his life for love and compassion!

We make choices every day. These little choices that we make are very crucial. You must have heard someone saying, ‘I have no choice.’ What does ‘choice’ mean? Actually, when we say ‘I have no choice’, it means we had choices but they were not liked by us. In short, they were ‘bad’. Choice is something that relates what we prefer and what we demand. While studying microeconomics we often assume that all consumers are rational and that their decisions maximize their utility. But is it so?

Let’s take a simple example. B likes swimming and hence joined swimming classes. He has two choices-either pay Rs. 50 per visit or Rs. 900 per month. If B goes for swimming frequently, the second choice must be preferred. But B is a busy man. He still prefers second choice thinking it cost Rs. 30 per visit. At the end of the month B finds that he went for swimming only 15 days and ended up paying Rs. 60 per visit. This, as some economists call is ‘irrational confidence.’ B overestimates his number of visits and hence lands on a lower indifference curve (See diagram).  Take another example, C goes to watch a movie. He wants to buy popcorn. (Is C actually hungry?) Small size cup costs Rs. 50 and large size costs Rs. 60. C’s decision to buy the large cup was not determined by his hunger level but by the thought of getting those extra popcorns for just Rs. 10. Had he bought a small cup, he would have saved Rs. 10 and also taken care of his ‘health’.

Thus, we see that there are many factors which influence decisions because of which consumers are irrational. If the ‘overconfident’ consumers think a little rationally, coupled by looking at the macro-economic indicators, then they can save a lot in times when prices are soaring high. Hence choices do matter!