Utility Maximization Theory and Economics Essay

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Is the Theory of Utility Maximization Reliable for Rational Consumers to Make Decisions?

The article by Rothman about Johnson’s book focuses on the topic of how most people use “bounded rationality” to make their decisions—that is, they do not use a true scientific process when deciding what to do with their lives. Rather they make choices based on constrained circumstances: they do not push the parameters of their knowledge or seek out all options and explore all possibilities, weighing pros and cons with statistical rigor. The reason is that most people prefer to follow whatever impulse feels right after a cursory examination of the situation, without expending a great deal of energy on the matter. They may spend two weeks deciding what type of laptop or car to buy, but that is because the specs have already been quantified for them: they only need to compare the numbers and the advantages or disadvantages. When it comes to their own lives, they do not know how to quantify the pros or cons of this or that decision. Thus, it is much more difficult to apply the theory of utility maximization, which stipulates that people spend their money trying to maximize the value of every dollar they spend. The reality is that many people do not do this at all. Many consumers are impulse buyers when all is said and done: the entire sales industry is based on the assumption that consumers are moved more by impulse than by well-reasoned argument or scientific approach to decision-making.

Johnson argues that a decision is a value-maximizing equation—but this is not necessarily true for everyone. Many are the people who never learn math and never want to learn it. The same goes for decision-making.

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They are quite content to make decisions based on intuition, gut, cursory examinations and impulse. There is a thrill in consumption that is akin to going to the race track. It is like briefly reading the horses’ names and then placing…

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…weighed the pros and cons and found the wars to be far too costly and not in America’s best interest. He says the soldiers could be better put to use on our own borders: why are they guarding Syria’s or worrying about protecting the Kurds? If they are going to be used, let them be used to protect Americans. His decision is based on the argument that too much money is being spent in the Middle East and there is no return on this investment. Thus, his decision is rational and based on value maximization theory.

Should the argument developed in the Rothman article cause us to reject standard microeconomic theories about consumer behaviour? Not at all. Just as no two people are the same, no one theory can perfectly explain the behavior of people. Multiple theories should always be considered when attempting to explain consumer behavior. Using only one is like putting blinders on and blocking out what is to one’s left or right, seeing….....

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