Saturday, January 7, 2012

Behavioral Economics for Firms

On Friday I read this piece by Karl Smith on Apple and this piece by Matt Yglesias on Barnes and Noble.  I was struck by how both of these examples showed firms actually in the best interest of the executive (who get perks from working at the firm) and not the shareholders (who want to maximize return on investment).

I wonder if there is a limit to how well firms adhere to economic models>  We already have decent evidence that people don't necessarily respond rationally (or else why would they buy Apple shares?).  But the executives in the company create a principal agent problem, which may also cause issues at the level of the company itself.

This is not to knock economic models.  Epidemiology has many of the same limitations and we have to rely on some pretty challenging assumptions.  Rather it is to be careful, with any model, to recall the limitations and exceptions inherent in modeling a complex process.

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