Did you toast a glass of bubbly as you rang in the New Year? Did you think through the law of decreasing marginal utility as you got the next glass? And the next?
The whole economic world is in disarray. The Sveriges Riksbank’s decision to award Richard Thaler the Nobel prize left many Boothies confused - “I thought market participants were rational agents” confessed a disoriented student. Chicagonomics and the Adam Smith Society decided to settle this once and for all in their last social event, a Frosty Beverage Exchange. The clubs set up an experiment to observe how Boothies interact in a trading environment. Would they behave rationally and maximize their utility or would they fall prey to their human irrationality?
Participants, who were distributed 20 frosty dollars each, could buy coupons at a trading desk that could be redeemed for different frosty beverages. Prices of coupons differed by type of drink and for each of the 10 trading periods. Participants could also sell coupons back to the trading desk and potentially make a profit. The objective was to subject this market to shocks to see how Boothies would react. As an operator of the trading desk I witnessed firsthand how strongly people reacted to price changes. Some would scream and wave their hand others would hand me forcefully their frosty dollars or coupons.
Later analysis of the data has taught us a few things. First, people prefer frosty beverages to sodas - only 3 sodas were consumed out of the 56 coupons that were redeemed. Second, most reacted to the prices changes as you would expect. They would buy when prices fell and sell when prices soared. Finally, data also revealed that consumption of some drinks was heavily dependent on price: no one would consume beer when its price reached 15 dollars. On the basis of this information it would seem that Boothies behave somewhat rationally.
Below we included some of the data generated so that the reader can make up their own opinion.
Chiganonomics believes that while the findings were insightful, more trials are required to settle this issue with certainty. The club therefore wishes to invites our readers to participate in the next social and help advance science.
Olivier is co-chair of the Adam Smith Society and Chicagonomics, and enjoys finding opportunities to apply economic theory to every day phenomenon, not just marginal utility of frosty beverages.