One of the workhorse concepts in Richard McKenzie’s excellent book Why Popcorn Costs So Much at the Movies and Other Pricing Puzzles is the idea that consumers can be rationally ignorant. Consider an argument he puts forth in Chapter 9 (entitled Why So Many Prices End in ‘9′) — he contends that one reason for the pervasive practice of “just-below” prices is that people ignore all but the most significant digits in a price, meaning that any reasonable producer would set all the least significant digits of a price at 9, since the consumer is indifferent to changes in those digits. His reasoning is that each digit we pay attention to takes the same amount of processing power, but the most significant digits make up a much larger percentage of the price -if you ignore all but the two most significant digits, your error is never more than 10% of the total price (and has the potential to be much less). If you ignore all but the three most significant digits, your error will never be more than 1% of the total price. There are diminishing returns to processing additional digits, as each additional digit has the same processing costs, but provides you less and less additional precision.

While I’m not saying this is the reason for “just-below” prices, it is an example that does a good job of illustrating the concept of rational ignorance — where the cost of additional information is greater than the potential benefit. The reason I find the concept, and many others in the book, so intriguing is that it starts to delve into the strategies that develop in a world where agents don’t have perfect access to information and where attaining information has an associated cost. The fact of the matter is that in this universe information isn’t always easy to come by, which can be a huge limiting factor in many fields. As I see it, logic is useful precisely because it allows us to economize on information-gathering and transmission. We won’t ever have perfect information and as such we have to live in an uncertain world — how we learn to quantify that uncertainty and make decisions in the face of imperfect information is, I think, an incredibly interesting puzzle.

Similar Posts:

• On the economics of vegetarianism
• Review of Predictably Irrational
• Review of Why Popcorn Costs So Much at the Movies

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Economics, Information, Rationality by Paul Ganssle