The economic approach to living life and making profits, as taught in class, can be intimidating. It requires maximizing [discounted] expected utility over an infinite life, using numerical computational techniques to developing an investment portfolio, and evaluating risky gambles by carefully considering the probability of each outcome and weighting that probability by the outcome payoff.
As teachers, we should periodically remind students that these are just models that help us understand the world. They do not necessarily reflect the thought process of even the most successful business person. The models may describe behavior, but not how decisions are made.
Example 1: When a professor from Columbia had trouble deciding on whether to accept a rival's offer or stay at Columbia...
His colleague took him aside and said, "Just maximize expected utility - you always write about doing this." Exasperated, the professor responded, "Come on, this is serious."
- page 1 from Gut Feelings.
Example 2: Harry Markowitz won the Nobel Prize in Economics from devising a mathematically sophisticated, and theoretically superior, method for determining how to allocate money over different investments. This method requires much data, much computer effort, and much programming. What does Harry do in practice? He simply allocates the same amount of money over each investment.
(from page 26 of Gut Feelings.)
When we describe our models of human behavior, and those models seem foreign or unrelated to actual life, we sometimes lose students. Let's remind students what models are really used for, and what people really do, so that they know we are indeed relevant to the world.
