Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Saturday, March 05, 2005

Is This a Rehash of the Old Marginalist Controversy?

Martin Kihn has recently written that nobody in business uses game theory [h/t to Truck and Barter].

[W]e assembled a panel of 30 respected game theorists around the world, and we sent them a survey asking, "Can you think of any examples of real, live companies that have consciously applied game-theoretical concepts to a real business problem?"
The response was . . . a deafening chorus of head scratching.
[W]e scoured the literature. We selected a relevant portfolio of 40 publications and submitted our queries. We tried again. And again. And we found . . . nothing . There were plenty of mentions of government spectrum auctions, and A Beautiful Mind came up hundreds of times. Not quite what we had in mind.
This silliness reminds me of the old Marginalist Controversy of the 40s and 50s, when bizskools all said that economics wasn't very useful because businesses just don't think in terms of marginal revenue and marginal costs when making their decisions.

Some economists responded, as indeed Ian does in an update to his Truck and Barter posting, that businesses behave as if they make these marginal calculations all the time. But big-time business decision-makers remained unconvinced.

As Mike Scherer once pointed out, though, a simple set of questionnaire results lent considerable strength to the standard economic models:

1. Do you use marginal revenue and marginal cost considerations to decide how much to produce and what price to set?

The answer was a resounding "No!"

2. Could you increase your profits by producing a bit more or a bit less?

Again the answer was "NO".

That is fairly strong confirmation that businesses act as if they use marginalism in their decision-making.

I would venture the same is true for game theory.
Who Links Here