Principle#3: Rational people think at the margin

ECO-MBA: UNDERSTANDING ECONOMICS WITH REAL LIFE SITUATIONS

Write up #3: Principle#3: Rational people think at the margin

This principle suggests that rational people take their decisions by thinking at the margins i.e. by comparing the marginal benefit with the marginal cost and if the marginal benefit is more than the marginal cost – it’s a “Go”, Else “No Go”. Let me try to explain this in layman’s words.

Imagine, your employer has recommended you to consider car-pooling due to the lack of parking space within the office facility. In order to choose your car pool partners, you will need to apply this “principle#3: rational people think at margin”.

A necessary assumption is that this scenario has a rationality conducive environment that is you (the person taking the decision) is not influenced by any emotional/personal biases about the colleagues.

Now that we have a perfectly rational environment, the only factor that affects the decision is location of residence of the colleagues. If the location of residence for the colleague under consideration is:

1.      On the way to office and back – you would not mind car-pooling with that colleague. Since the marginal cost (extra driving time, fuel consumption, traffic fatigue) will be insignificantly low and marginal benefit (networking and getting a parking space in office) will be an added advantage. 

OR

2.      Not on the way to office and back – you would mind car-pooling with that colleague. Since the marginal cost of additional driving time, fuel consumption and traffic fatigue is significantly more compared to the marginal benefit of networking and getting a parking space in office.

In practical life, there are many such decisions that we do take considering marginal benefits and costs. However, there is always a flavor of personal bias or emotional trigger involved that influences our decisions. Personally, I would car pool with my friend even if his location of residence is way out of my route to back home (unless I live in Bangalore or Mumbai 😊).

In the comments, Let me know if there are any instances where you did choose higher marginal cost over benefit and was there any emotional trigger / personal bias involved?

Coming up next is “principle #4 : People respond to incentives” ….. Coming in 3 days