Choice: choicemaker's internal rate of tradeoff
I've been talking about the conceptualization of choice as selection from a set of genuine options, toward fulfilling an objective. I've mentioned in passing that this inherently involves comparing the possible options with each other.
Economists think of choicemakers as *usually* considering rates of tradeoff of two sorts-- internal and external.
This idea is based on an assumption that items in a chosen basket are divisible-- that you could choose to have a crumb more guns in exchange for giving upa morsel of butter. As that example makes clear, perfect divisibility is an idealization-- a portion of gun is not usually a gun at all, though you can divide butter by the milligram or less. Still, as an idealization, it works well in many situations where there's some divisibility.
The internal rate of payoff is the amount of item A you would be just willing to give up for another unit B in your chosen basket. Say, how much rice (in weight) you would give up for another milligram of kim chi. And as that example makes clear, that internal rate of tradeoff usually depends on where you start from in thinking about adjusting one's basket. If I have a lot of rice and little kim chi, I'm probably willing to give up quite a lot of rice to get more kim chi. If I'm already long on kim chi, I woudln't be willing to give up as much rice to get more of it.
That internal rate of payoff relates to my objective-- in the case of rice and kim chi, probably the enjoyment of a meal, or perhaps my nutritional objectives.
Economists do not assume that we can observe our own internal obective-dependent rates of tradeoff, let alone anyone else's-- just that we act as if we're doing this. The external rate of tradeoff is observable and a profound concept.
Facebook post incorporated:
Defining choicemaker's internal rate of return
Economists think of choicemakers as *usually* considering rates of tradeoff of two sorts-- internal and external.
This idea is based on an assumption that items in a chosen basket are divisible-- that you could choose to have a crumb more guns in exchange for giving upa morsel of butter. As that example makes clear, perfect divisibility is an idealization-- a portion of gun is not usually a gun at all, though you can divide butter by the milligram or less. Still, as an idealization, it works well in many situations where there's some divisibility.
The internal rate of payoff is the amount of item A you would be just willing to give up for another unit B in your chosen basket. Say, how much rice (in weight) you would give up for another milligram of kim chi. And as that example makes clear, that internal rate of tradeoff usually depends on where you start from in thinking about adjusting one's basket. If I have a lot of rice and little kim chi, I'm probably willing to give up quite a lot of rice to get more kim chi. If I'm already long on kim chi, I woudln't be willing to give up as much rice to get more of it.
That internal rate of payoff relates to my objective-- in the case of rice and kim chi, probably the enjoyment of a meal, or perhaps my nutritional objectives.
Economists do not assume that we can observe our own internal obective-dependent rates of tradeoff, let alone anyone else's-- just that we act as if we're doing this. The external rate of tradeoff is observable and a profound concept.
Facebook post incorporated:
Defining choicemaker's internal rate of return