|
Similarly, the theory that firms apply
the concept of marginal costs and revenues to fix product
prices is a myth. Most businessmen have no clue as to their
marginal costs and revenues. Research has shown that most
business use cost plus pricing to set their prices, and then
modify them according to the prices charged by their
competitors.
The world of business is not as simple as economists make it
out to be. The rational decision-maker who is at the core of
most of economic theory does not exist in the real world.
Human beings do not always act to maximize their utility.
They also make decisions with imperfect information. But why
do most things fail? According to the author, the answer
lies in the almost unbelievable complexity of the
environment in which decisions must be taken. |
|
Decision models are simplifications, and in most cases, simplifications to
such an extent that they are no help in real-world situations. The author
gives the example of tic-tac-toe and chess. Even a chicken can play
tic-tac-toe without losing to a human. Chess on the other hand, is far more
complex - so much so, that it not possible, even with the most advanced
computer, to figure out the optimum strategy for a given distribution of
pieces on the board. And so is the case, with the best laid schemes of mice
and men.
The book also discusses game theory. Again, as with most tools of economics,
game theory fails to provide a guide to action, except in the most
simplified circumstances. In the real world of business decision-making, the
number and nuances of the choices available to the protagonists, and the
variety of possible outcomes are so large that they overwhelm the computing
power of the most sophisticated computers, leave alone the power of humans
to comprehend them.
More >>
|
