Sunday, June 21, 2009

The lunch was missed, so was breakfast

A conversation about economic theory was instigated by the most random discussion topic today: the Just-15-more-minutes-of-sleep Syndrome that most of us suffer from.

Basically, my brother and I were lamenting the fact that if we could only wake up 15 minutes earlier every day, we would not have to rush through eating our breakfast (if we even have time for that), and we would be able to make ourselves a nice lunch to bring with us to work - thus cutting back on our daily expenses and being able to save for that long-anticipated vacation at the end of the summer.

Which got us talking about the most basic assumption of mainstream economic theory: that human beings are 'rational actors' who are also 'utility maximizers' (looking to increase their happiness, however they measure happiness.)

But waking up an extra 15 minutes early could be for the rational utility maximizing human being the farthest thing from 'happiness' at that particular moment (think back to the comfort of your bed on a cold winter morning and how 'happy' you are to be there.) Hence, the decision to 'maximize utility' by sleeping 15 minutes.

Which brings us to another concept and econojunky term, "opportunity cost". This is essentially a fancy way of saying 'what you give up to get something else.' Now the opportunity cost of 15 minutes extra sleep would likely be: a good breakfast; the cost of paying for your lunch at work as opposed to bringing one with you from home; and the regret that builds up every passing day knowing that all you have to do to remedy the situation is have some will power and wake up earlier.

So later in the day, you'll likely think back and realize that your decision not to wake up 15 minutes earlier was pretty irrational. In hindsight, the value of the 15 minutes of extra sleep decreases exponentially. Because you think in actual 'utility maximizing' fashion, and not in the 'pseudo-rationality' (my brother's term) that characterizes your lazy and hazy morning thought processes.

So when your thought process changes so drastically from morning to noon, you realize how dodgy the entire assumption of homoeconomicus as a rational utility-maximizing actor really is.

So where am I going with this?

Well, considering the magnitude of the banking collapse that we witnessed in the U.S., and in light of the incredibly shocking admission by ex-Federal Reserve Chairman Alan Greenspan that “those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief”, it is clear that the assumption is beyond flawed, it is actually dangerous.

Human beings may think in utility maximizing terms sometimes. But usually this is done in hindsight. That is fine, and I have no problem with that. But to have built the edifice of modern financial systems on this most flawed assumption that people will 'always' act in a utility-maximizing way and to continue to promote it and teach it as such is not only intellectually lazy, but self-destructive as we saw all too clearly.

The modern financial capitalist system was suffering like the millions of us from the Just-15-more-minutes-of-sleep Syndrome - except for them it was more like decades of pushing the snooze button so as not to wake up and face the reality of having slept-in.

Now the system was forcefully woken up, the breakfast was missed which weakened the system from day to day, the lunch wasn't made which has cost billions to the taxpayers, and the days of regret and self-flagellation will be numerous.

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