The world's funniest economics stories

Chapter 24 Know Yourself, Know Your Enemy, and Win a Hundred Battles, Influencing Decision-making Chips (3)
Under normal circumstances, people make bounded rational decisions based on limited information.If you do not seek information when making a decision, as an actual decision, the probability of making a wrong decision will be very high, which is an irrational behavior.However, if you spend too much time and money to find information, the cost of searching is greater than the benefits, and your behavior is irrational.In this way, if we call the increased cost of finding a little more information the marginal search cost, and the increased revenue from obtaining more information is called the marginal search revenue, then we should achieve the marginal search cost equal to the marginal search revenue when we search for information.Only in this way can we achieve what economists call maximization.

Different people buy groceries in different ways because of their different search costs.Let’s start with the analysis from the previous story.In the story, Wang Ma is an old man with plenty of spare time, so her cost of finding information is almost zero, because the time she spends searching for information is of no other use.Therefore, within a certain reasonable range, it is a rational behavior for an old lady to go to the vegetable market to buy high-quality and cheap vegetables.

But it is different for Xiao Li who is a working family.If she can earn 20 yuan for an hour of work, and the vegetables she buys at the vegetable stalls are 20 yuan cheaper than the ones she buys without going to the vegetable stalls, then it is rational for her to spend an hour shopping at the vegetable stalls to find information.However, if the benefits of visiting the vegetable stall for an hour are not so much, then her behavior of visiting the vegetable stall is irrational.

In our daily life, maybe we don’t know much about economics, and we don’t need to calculate the marginal cost or benefit to us very accurately, but we all follow the The principles of economics work.It can be seen that if we know more about economics, our behavior will be more rational in our daily economic activities.

For the composition of search costs, experimental psychology often refers to the signal detection theory in information theory to describe many information behaviors of people.The theory holds that people's responses to information are divided into four types: concentration, correct rejection, false positives, and false positives.Concentration refers to successfully finding the target information; correct rejection refers to successfully eliminating information noise; false reporting refers to treating noise as target information; false negative refers to treating target information as noise.

Therefore, successful information seeking must be a combination of the first two: successfully finding the target information and eliminating information noise.So we can get the formula: information search cost = cost of obtaining target information + cost of eliminating information noise
The relative importance of these two costs is different in different historical periods.In an era of lack of information and poor information circulation, the cost of obtaining target information is far greater than the cost of eliminating information noise.In the era of information explosion and unimpeded information, the cost of eliminating information noise is likely to be greater than the cost of obtaining target noise.

6. The Wisdom of King Solomon - Information Screening Mechanism
In the records of the Old Testament of the Bible, King Solomon is the most intelligent human being, and there are many legends about his extraordinary wisdom in many books.

At that time, King Solomon liked the Queen of Sheba who worshiped fire in the south very much, and proposed marriage to the queen.However, Queen Sheba was very dissatisfied with King Solomon's wisdom and wanted to make things difficult for him.Taking the opportunity of proposing marriage, Queen Sheba came up with a question to test King Solomon.

She called a servant to bring in two bowls, one containing 10 gold coins and the other 10 silver coins of the same size.She said to King Solomon: "Blindfold your eyes, and I will switch the two bowls on the table at will. Then you choose a bowl at random, take out a coin from it, and if you choose a gold coin, I will marry you." ;If silver coins are chosen, I'll have to think again."

King Solomon looked at the queen, thought for a moment, and said, "My dear queen, before I finish this question, can I arrange any combination of coins in the bowl?"

Because the number of coins in the two bowls is the same, the probability of King Solomon choosing the gold coin is 5/[-].Even if King Solomon put [-] gold coins in each bowl, the probability of being selected is [-]/[-].Therefore, Queen Sheba did not object to King Solomon's proposal.

King Solomon put one gold coin in one bowl and the rest of the gold and silver coins in another bowl.In this way, the probability that he can draw any bowl is 1/38.If he wins the bowl with only one gold coin, then the probability of him getting the gold coin is [-]%.Therefore, based on such a calculation, his total probability this time is a one-half probability.If he can draw the bowl with gold and silver coins, the probability of getting gold coins from it is [-]/[-], and multiplying by [-]/[-] will get [-]/[-]. The total probability of withdrawing gold coins.

Now we add the two probabilities to get fourteen out of nineteen.When writing the question, it was stipulated that as long as King Solomon could get the gold coins, it was not stipulated which bowl he got it from.Fourteen nineteenths is about 0.7368, which is almost three quarters, which is the probability that King Solomon will get the gold coin.

This wise little story of King Solomon explained to us a truth, that is, in modern society, no matter what industry you are in, information screening plays a very important role, which we cannot ignore.

The concept of information screening was proposed by Rothschild and Stiglitz after further developing the research results of Akerlof and Spencer. This concept means that through a certain contract arrangement, the party lacking information can The real information of the other party is screened out to achieve efficient market equilibrium.

The theory of information screening model is a mechanism design of modern information economics to solve the problem of adverse selection under the condition of asymmetric information. It is explained by the principal-agent term of modern information economics. Produce an equilibrium outcome that is more favorable to both parties to the transaction.

Here, we can regard the relationship between the market leader and consumers as a principal-agent relationship. It is impossible for the market leader to know the demand information of each consumer, but the distribution of demand information can be collected through market research, design and A series of price contracts are formulated for each potential consumer to choose, and consumers combine their own demand information to choose the corresponding contract.

In this way, market leaders can obtain consumer surplus incompletely through consumers' active self-selection, and indirectly distinguish different market segments.

In the above short story, King Solomon belongs to the side that lacks information, while Queen Sheba stands on the opposite side, and she has a lot of useful information.King Solomon wanted to improve his chances of success, so he adopted the method of "information screening". He discussed with the Queen of Sheba, and under his combination, he obtained a lot of real and useful information, which improved his chances of success. probability.

The information screening mechanism plays a very important role in improving product sales and service quality. This mechanism is widely used especially in the insurance industry.For example, in the insurance contract of an insurance company, the policyholder knows his own risks, but the insurance company lacks this information, so the insurance company formulates different insurance contracts for different types of potential policyholders, and the policyholder will use this Choose the insurance contract that suits you according to the risk.

Information screening is a transaction method, method [or contract, contract] proposed by a party without private information in market transactions in order to reduce the adverse effects of asymmetric information on itself and to distinguish between different types of transaction objects.

Signaling is very different from information screening.In the information screening model, in order to generate a separation equilibrium, the same transaction contract proposed by the screener [the party without private information] must have different benefits for different screened parties; while in the signal transmission model, the same signal has different benefits for different screened parties. Senders must incur different transaction costs in order to generate a separating equilibrium.The difference between information screening and signaling is that in the information screening mechanism, the party without private information acts first, while in the signaling mechanism, the party with private information acts first.

7. New Interpretation of "The Emperor's New Clothes"--Public Information
"The Emperor's New Clothes" is a very famous fairy tale by Andersen. Now this fairy tale is not only a fantasy in the minds of children, but also takes place in modern society.

Take the real economic crisis as an example. In November 2008, economist James Galbraith said in a media interview that among the many professional economists in the world, only 11-10 people fully predicted the coming of the financial crisis.Among them, headed by Mises of the Austrian school of economics, many economists have already smelled the crisis.Experts of the Austrian school of economics who first predicted the real estate bubble, many of them predicted the crisis we are suffering now, they believe that the chief culprit of all these crises is the Federal Reserve.

As an independent agency, the Federal Reserve has used low interest rates to create high leverage, speculation, and increasing debt, misleading many investors, covering up the real economic situation, and ultimately messing up the market.

The Federal Reserve's intervention policy has created a false sense of economic prosperity, leading to the accelerated formation and bursting of the housing market bubble. During this period, the free market has inevitably become a scapegoat.In the face of such a sudden crisis, the people did not blame anyone, but accepted it silently. Just as the economist Henry Hazlitt said more than ten years ago, these man-made bubbles will inevitably lead to a "big crisis." and the Great Depression, but what is worse is that the public will mistakenly believe that the economic depression is not caused by previous inflation, but is caused by the inherent defects of 'capitalism'."

The actions of the Federal Reserve are very similar to Hans Christian Andersen's fairy tale "The Emperor's New Clothes". for.Even when government measures are blamed for failure, they are avoided, and the hapless free market is wronged and innocently made a scapegoat.But sooner or later, this game will come to an end, and one day the Federal Reserve's transparent cloak will be ruthlessly exposed by the public.

The fairy tale of "The Emperor's New Clothes" is believed to be familiar to everyone. The literary explanation is nothing more than the ugliness of human nature and the approval of the public, but in economics, it has a new explanation, all of which are related to public information. related.

Public information is information that is freely available to all market participants.In the highly competitive oligopoly, economic agents have a particularly urgent need for market knowledge.They objectively assume that the behavior of other competitors is reasonable, that is, they assume that all market participants have public market knowledge.This common market knowledge is public information.

Robert Vilicchar believes that when the market with information set A is efficient, and among the information available to each market participant, only the knowledge of information A enables market participants to generate common or homogeneous This is the common sense or common knowledge of the market.Simply put, public market knowledge refers to the assumption that all relevant information is available to all market participants.

In the above story, the Federal Reserve is nothing more than occupying the right of market participants to obtain public information. Market participants have no channels to obtain public information, so they lose part of their resources in the competition.After the crisis, the Federal Reserve did not inform market participants of public information, but continued to implement its own policies arbitrarily. It is this kind of domineering that led to the crisis.

Public information has a positive effect. Firstly, public information in the market leads to market dominance. Secondly, the existence of public information greatly hinders the sharing of risks, thus destroying the corresponding expected returns of market participants.

Oligopoly, also known as oligopoly and oligopoly, refers to a small number of sellers.In an oligopoly market, only a few manufacturers supply all or most of the products in the industry, and the output of each manufacturer accounts for a considerable share of the total market, which has a decisive impact on market prices and output.

(End of this chapter)