Lecture 1 Consistency

Lecture 1 Consistency - Economics 101 UCLA Jernej Copic...

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Economics 101, UCLA Jernej Copic Lecture 1. Rationality in decisions and expectations over lotteries. Bob interrupted Number One and Alan in their conversation. Indeed, more of an instruction than a conversation: “When you make it to the W coast, make sure to first contact Squitty. He will give you some necessary training. Also, here is the stash of greenbacks in 1-dollar bills, and our depot of flower pots is at your disposal, should you need to temporarily borrow some for your training; just make sure that there are no flower pots missing when you are done. Whatever cash you are left with shall be your reward, and you don’t need to pay any extra fees to Squitty, just enjoy the training, hehe... So? Why are you still here, staring at me? Start walking already, or you will never make it there!” Accompanied by these warm words of fatherly farewell Alan walked through the door of the little flower shop and embarked on his mission. As soon as he closed the door behind him, Bob jumped: “What is it that Squitty will train him in?” - “Rational behavior,” was the cold reply. “Huh?” “Well,” continued Number One, “I know I can be pretty sure that Alan will not behave rationally, unless he gets some training.” “Why is that?” “He seems to not choose consistently . For example, when he is lounging in his apartment on Sunday afternoons above the 5th Ave, figuring out what to do, he sometimes has a choice between watching TV, hanging out with you guys, and sleeping. When it is not too noisy to sleep, that is. Of course, when it is too noisy to sleep, he only has the choice between watching TV and hanging out. Now, my point is that he chooses hanging out with you guys in the latter case, and he decides to watch TV in the former case.” Bob was still confused: “I still don’t understand why that would be inconsistent. Perhaps he just likes it that way, or maybe his mood changes, or maybe he has enough of one or the other and wants to do something di ff erent for a change?” “First, Alan is a very monotonous guy and a man of habit. He would never try something 1
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di ff erent than what his impulses guide him to do, and as we all know, his impulses are not particularly interesting. He has no moods, and he never does anything to change himself, such as for example reading a book, or attending a lecture. One could say he is a pretty simple man. So much so that he even influences the climate in the vicinity of his apartment so even the weather down there never changes. Still, Alan never likes two things just equally well - he is never quite indi ff erent.” Bob insisted. “But does that make him inconsistent?” “Of course not - His choices do. See, let’s describe his available choices, or his choice set by { x, y, z } in the first case, and { x, y } in the second case. You follow?” “You mean x would be ‘TV’, y would be ‘hanging out’, and z would be ‘sleep’?” “Good, you are a genius! I hope you understand that the advantage of this description is that we can in this way describe many other situations that Alan may face...” - Bob’s face
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