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Omnipresence of Economics

Posted on December 15, 2020 by Rishika Aggarwal  | Student Speak

iWrite Essay Competition: 2nd Winner

The Indian School of Business and Finance conducted an essay writing competition, iWrite, for its students, providing them with an opportunity to express their knowledge on Economics, Management and Finance by citing real-world examples or issues and their possible solutions. The competition received tremendous response from the students, where the jury shortlisted three participants for the prizes. These students were honoured during ISBF’s first virtual assembly called iAssembly. The assembly was conducted online where Chiraag Mehta, Associate Director of ISBF announced the winners and congratulated them. Rishika Aggarwal, a student of the PG Diploma in Data Science programme for 2020-21 bagged the 2nd position in the iWrite competition.

Omnipresence of Economics

Rishika Aggarwal| PG Diploma in Data Science (2021)

Economics textbooks often lead many of us to believe that it is all about maximizing our wants with limited resources and answering a narrow set of questions centred on money. The field of economic sciences, however, encompasses the tools to understand all human behaviour from the idea that people have objectives and tend to act rationally to achieve them. It is a science-themed around reason and the consequences of our decisions and not just money. It is prevalent in subtle ways in our daily lives like solving dilemmas, moving faster in a traffic jam, voting, dating, saving money for a movie, trying to lose weight etc.

Taking the basic daily norm of attending a lecture is an example of economics in action. During the class, the professor often asks students if they understand everything they taught thus far or not. Students as a group would definitely benefit more if they were honest when they didn’t understand anything in a difficult lecture instead of staying silent when the question is asked. However, from the perspective of a student, this causes a conflict between individual and group rationality. If they are unable to follow-up and choose to remain silent, then everyone would simply be worse off. If an individual student does act rationally and admits that he or she didn’t understand anything, then they would be exposing their ignorance to the whole class. This small dilemma in itself is economics playing out in our everyday life.

Simple decisions that individuals make are guided by the opportunity costs associated with every option, every choice. Opportunity cost basically means that to gain something, we must forego something. Whenever a decision is made, the price we pay for it is in the alternatives we let go. A relatable example would be, every time we choose to binge-watch another episode of Stranger Things on Netflix, instead of doing our assignments, it is this concept of economics playing out.

Even if we try to understand human behaviour and how people make decisions, we can do so using economics. We often see that voters are ignorant of the politicians they vote for, while they are very thorough with their decisions to buy a car or a phone. Analyzing the fact that the time and effort a person spends on deciding what car to buy will with certainty affect the outcome. In the case of politics, the probability of his decision affecting which candidate wins is one-millionth or less, making the cost of finding that information exceedingly less. He would rationally choose to invest more time on the decision about the car where his payoffs are higher. He would rationally choose to be ignorant when the information costs more than it’s worth!

Looking at how real people behave concerning their own lives, people make trade-offs between their lives and other minor values. People smoke even though it reduces life expectancy. We choose to eat sweets despite the increased risk of a heart attack. Everybody wants a little more than what we have. Since we cannot have enough of everything, we must accept trade-offs among things we value differently, be it life, relationships or the most trivial comforts.

Another fascinating concept in economics relevant in our lives and relationships is of revealed preference. We can decipher people’s choices and priorities by observing what they value more, which is divulged by their actions. A smoker’s claim that he prizes his life infinitely cannot be used to predict future behaviour or decisions as his preferences are revealed by his actions every time he lights a cigarette. Actions, thus unveil preferences!

Economics is a way of understanding the real world. It is a collection of theories that if we start testing on the real world, it becomes a science. To understand how well the theory and its predictions fit in real life, one must simply observe.