Thinking through consumption and savings decisions can be difficult. It is one of the biggest questions that the study of economics tries to answer. Traditional models assume that consuming more is good, (this is formally called local non-satiation), and individual utility is a function of what we consume, which depends on our wealth and prices. The concept of utility is built upon our “preferences” which guides us towards preferring some goods over others, yielding higher utility for some goods over others. We then optimize this sliding scale of utility according to the given prices and wealth.
Under certain circumstances, this I think this can be accurate. If I am living paycheck to paycheck, or am heavily constrained by my budget, my options for spending are necessarily fewer. I am simply priced out of some goods, and if the price of one good that I really need rises, then I need to offset that cost by substituting towards a cheaper good somewhere else. I need to be very careful about how I spend, and my preferences of one good to the next are highly consistent.
But if I do not live paycheck to paycheck, I might still spend according to my preferences, but my spending might be a bit more random. If I feel like ordering take out one night instead of cooking, I probably can and it doesn’t make much of a difference.
This optimization problem of thinking about consumption and savings decisions can be difficult, even if we assume away that our preferences are highly consistent and more of a good is always better.
Then thinking about why we make the consumption and savings decisions we do can be another exercise entirely. That is, why do we prefer the goods we do? And why do our preferences change over time?
Some of the nations brightest are working on answering this question by looking inside the brain.
I suspect this is will help us come to better understand what is going on behind the scenes, the chemical combination required to create our behavior.
Whether those chemicals are generated mainly by genetics or mainly by environment is unknown, (or, nature vs nurture if you like) but if I were to guess it would be a combination of both. I also want to make the distinction between environment and situation here, of course decisions might be situation dependent, but the environment you are in might include things like experiences, cultural norms, familial dependencies, etc.
And if you were to base your consumption decisions on your environment, this might be depend on your set of beliefs. How you perceive the world, or what you believe to be a threat to your way of life could highly alert your decision making. For example, if I believe that I have a chance of being robbed since there were a string of burglaries in the neighborhood, I might buy a home security system. In this situation, my preferences didn’t change- I didn’t suddenly prefer to not be robbed after preferring it, but my belief that I needed security did change.1
In this example I somehow learned about the string of robberies. The information traveled to me likely through either witnessing a break in or hearing about it from the neighbor.
To me, building microeconomic theory on static preferences is just too high of a level. Just like underneath molecules there are atoms, underneath consumption might not be preferences, but beliefs.
These beliefs can be updated, created, or given to us from those close to us (either geographically or in our social circle.) And how that happens could be modeled by borrowing from good old chemical engineering mass transfer.
I was recently told that sometimes the math in these posts can be a bit too involved, so I’ll try to stay in text and just give one equation, Fick’s first law of mass transfer.
J = - D dC/dz
Where the flux, J, or the rate of mass transfer per unit of time, depends on a constant for the mass D, and the concentration gradient. In short, this means that fluids travel from areas of high concentration to low concentration.
You might have experienced Fick’s law when you smell dinner cooking in the oven or someone wearing a strong cologne walk into the room. The gas originates at a point, geographically, and diffuses through the air and towards your nose.2
For beliefs, the rate at which an idea or belief travels may depend on some constant which depends on the idea itself (I suspect easy to understand, contrarian, and urgent ideas spread faster) according to how concentrated the idea is among those who are (geographically or socially) close to you.
Eventually, either the fluid fully diffuses, or more gas is generated (say from your dinner cooking!) I suspect this could play the role of lobbying. For one reason or another ideas have champions, who want to propel them through space and time and continue to shout them to anyone who listens.
Once these beliefs reach us, we may perceive the world differently. And once that happens, we may change our decisions. I wonder aloud whether Fick’s law could be used in this capacity, via an agent based learning model that has a geographic component to it.
Might be an interesting research topic!
1. *Traditional economics might argue here that preferences didn’t change, but we are consuming different goods. A security system under threat of robbery is a different good than a security system not under threat of robbery. My response here is that this assumes you know the situation you are in- threat or no threat. This is a very strong assumption!
2. Fick’s law also holds for various shapes. So mass transferring through a tube or a cylinder might act differently than mass transferring through a 3D, open space. This might apply to different information channels, as something like Twitter can be thought of as a way to increase exposure to new ideas, or like a ventilation system transferring air into different rooms.
Hi! I noticed you claim not to be living paycheck to paycheck, but a quick glance at your venmo makes it seem like all beer money is a one way path towards you never away. Makes you think