Economics and Prediction

Loewenstein and Thaler (1989) were particularly concerned with anomalies associated with intertemporal choice. The term "intertemporal choice" refers to decisions made by people in relation to actions where either or both the costs and benefits associated with the decision are spread out across time (Loewenstein & Thaler, 1989).

By way of illustration, a person may make a conscious decision not spend money on something they want today so that they can save money to buy something that they want even more at a later date. Two important economic theories are involved in a decision choice that spans time periods from the present to a future date.

The first theory is expected utility theory (Machina, 1987). Thus, person considering the purchase of a new home theatre system may be able to acquire such a system for the $1,000 that he or she is capable of spending today. This $1,000 system, however, may not have all of the bells and whistles that the person really wants in a home theatre system. The person knows that for $5,000 he or she can get the home theatre system that he or she really wants. There is a major difference in the utility (pleasure translated into a value) that the person expects from the two home theatre systems. To save the additional $4,000 required for the preferred home theatre system, however, will take time. It is at this point that a second economic th

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ption 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 economic decision at different points in the life of the decisio
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Approximate Word count = 1446
Approximate Pages = 6 (250 words per page)

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