1.2. A real life example

Let's begin our study of optimizing
behavior, with a real life decision

problem, which was originally ambitioned,
by the behavioral economist, Richard

Taylor, from the University of Chicago.
This is an example or a situation, that

you may very well encounter in your daily
life. So, consider the first version of

the problem. Imagine that you are about to
purchase a jacket for $125 and a

calculator for twenty, for $fifteen.
As you're about to pay for these things,

the salesman informs you that the
calculator, that you are going to buy, is

on sale at $ten, but at the other branch
of the store, that is located across town,

twenty minutes away by car. Question,
would you make a trip to the other store

to achieve those savings? Now, consider a
second portion of the problem, that is

closely related, but different, so pay
attention. In this scenario you are able

to purchase the same jacket for $125.00
and the same calculator for $15.00. But in

this case the salesman, salesperson
informs you that it is the jacket that you

wish to buy that is on sale for $120.00 at
the other branch of the store which is

again located twenty minutes away by car.
Question would you make the trip in this

case? Now, if you are like a typical
subject in Richard Taylor's experiments,

you probably made the following choices.
When the discount was in the $fifteen

calculator, you chose to drive across
town. However, when the $five discount was

in the $125 jacket, you chose not to drive
across town. When subjects are queried

about the reasons for their behavior, they
point out that, in the first case, driving

across town led to a large discount of
33%. Whereas in the second case, driving

across town only led to a discount of
four%..

The problem with this experimental
results, and perhaps with own behavior, is

that it's not compatible with basic, with
basic economic optimality. Let's think

why. Let the variable C, denote the total
cost in dollars of traveling across town,

this may include for example the cost of
depreciation in your car. The cost of gas.

On any cost of time, or dislike of
driving. Dislike of driving or traffic.

Think of it as the option of the total
cost. Then optimal behavior requires that

you travel across town, if and only if,
the savings that you're going to achieve

in dollars, exceed the cost of traveling
across town. Whether, and this is the key

idea, the savings come from a. $125
jacket, or a $ten, a $fifteen calculator,

sorry, doesn't really matter. The key is
whether the total amount of dollars that

you are saving is enough to justify
incurring the cost, the total cost of

traveling across town. That is how optimal
individuals should behave in this program.

Unfortunately, its not how some people or
many people sometimes behave. Please don't

feel bad if you chose to travel across
town for the $five discount in the

calculator but not for the $five discount
on the jacket. That behavior is extremely

common especially upon first encountering
the problem. The good new is that now that

you understand the principles of
optimizing behavior on work, you're

unlikely to make the same mistake again. I
chose this example for two reasons. First,

it helps me provide very concrete
motivation for how understanding the

principles of optimization and optimizing
behavior may help you in your daily life.

But more importantly, it also motivates
the rest of the unit, by showing you that

the principles of optimization behavior
are not always of use and that it requires

some thinking to understand what optimal
behavior looks like.