What this lesson teaches
I can describe how people and firms gather information, weigh costs and benefits, and review choices and their side effects.
Syllabus 9570, 1.1.2(b). Decision-Making Process of Economic Agents: In the pursuit of their objectives, economic agents gather information, weigh benefits and costs, consider constraints and perspectives before making decisions. They take into account the intended and unintended consequences, and any changes occurring, before reviewing the decisions
Make a guess
A school picks a robotics club over a debate club. A year later, few students join robotics. What should a good decision maker do?
- Review the choice, using the new information about demand.
- Close robotics at once and never review again.
- Keep the robotics club, because changing looks like a mistake.
Show the answer
Review the choice, using the new information about demand.
The first choice was made with the information then. New facts change the expected benefit, so the school should check whether the debate club now looks better.
Review a decision when new information shows the outcome is different from what was expected.
Decisions are made with the information available at the time. When new information arrives, a good decision maker reviews the choice.
To review a decision, go back to the aim. Is the chosen option still achieving it? Has the opportunity cost changed?
A review can lead to keeping the decision, changing it, or switching to the alternative that was given up.
Governments review policies regularly. Singapore adjusts its property cooling measures and COE quotas as market conditions change.
- When to review
- When new information changes costs or benefits.
- How
- Return to the aim and the alternatives.
Worked example: Reviewing a weekend shuttle
A volunteer group chooses a weekend shuttle over home visits, expecting many elderly residents to use it. After a trial, few use the shuttle, and demand for home visits grows.
- Original aim: help elderly residents reach essential services.
- New information: the shuttle is not reaching them, while home visits are in demand.
- The opportunity cost of the shuttle, the home visits given up, now looks larger.
- Decision: switch the volunteer hours to home visits, and review again after the next trial.
Watch out for this
Changing a decision means the original decision was wrong.
A decision can be sensible with the information available at the time. Reviewing it when conditions change is good decision-making.
Check your understanding
Why should a government review a policy after it has been introduced?
- New information may show costs and benefits differ from what was expected.
- Leaders change over time, and each new team should put its own stamp on policy.
- To reverse a policy as soon as it becomes unpopular with voters.
Show the answer
New information may show costs and benefits differ from what was expected.
Right. Reviewing lets the government adjust the policy to meet its aim.