Going back to the illustration of the person considering the purchase of a home theatre system, the greater utility of the preferred home theatre system in relation to the one the person can afford today diminishes over time, e.g., the longer it takes to save the money required for the better system, the less important the quality difference between the two systems becomes because there is a time point beyond which the person is not willing to wait.
Loewenstein and Thaler (1989) and other economists apply these economic theories to a wide array of choice made by economic agents (individuals, households, businesses, and so forth) to explain economic behaviours. Economists assume that all economic agents have stable, well-defined preferences. Up to a point, that assumption is true, but human nature being what it is, people change their minds. They simply are not the rigid automatons that economic theory assumes them to be. Economists also assume that people always make rational choices. To economists, a rational choice is the choice that maximizes the value (converted to monetary terms) of a particular proposition. Again, however, people (human nature being what it is) frequently apply decision criteria other than the bottom-line economic outcome. Changing one's mind over time and applying decision criteria other than the maximization of monetary outcome produce the anomalous results that tend to confound economists. This fact is hard for economists to accept. Thus, economists tend to avoid dealing with real people and to develop theory in laboratory conditions where they can assume away the unstable characteristics of human nature.
Loewenstein and Thaler (1989), as well as other economists, also contend that the discount rate that people assign to a particular factor involved in a decision should be stable over time. In fact, however, people change their assessment of the utility of whatever it is that is involved in an e...
The Economists' Prediction. (1969, December 31). In LotsofEssays.com. Retrieved 16:17, September 30, 2016, from http://www.collegetermpapers.com/viewpaper/1304306373.html