pcecon.com Class Notes
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It is impossible to know everything that would be good to know when a decision is made, so most decisions are made without knowing everything. This is due to costly information or information costs. Little information that can help make a decision is free, and some of the information that we need to make the right decision is so hard to get that its cost is out of our reach (because we cannot predict the future).
This means that we will some day look back on some decisions and decide "If I knew then what I know now, I would have done that differently." However, if you made the best decision knowing what you knew at the time, and if getting more information didn't seem worth it or was impossible at the time, then you did the best you could.
Also, when we have to make a decision, but wish we knew more, well, that's part of life. Missing an opportunity because you couldn't make up your mind is a kind of decision, too, and often one with more regrets than making some other kinds of mistakes.
Sometimes, a decision affects more than we think it will. When a decision affects the cost and benefits of other decisions or actions, we call those effects secondary effects. Secondary effects can be effects on future decisions or on decisions that will be faced by other people. Understanding and anticipating the secondary effects can prevent decisions from causing surprises, and prevent what we might later perceive as mistakes.
In making decisions, we react to the changes in the costs and benefits (utility) that they perceive. This is called "responding to incentives," because "response to changes in the costs and benefits perceived" is just a little long. If the cost of a particular option is increased, a person is less likely to choose it. Similarly, if the utility of a particular option is decreased, a person is less likely to choose it.
We observe that when a person is given a choice of several ways to get the same benefit he or she will choose the way of doing things that involves the lowest cost (in terms of marginal opportunity cost, of course). This is called economization or economizing behavior. Notice that, when we economize, we are not necessarily choosing the option that has the lowest MONEY cost, since saving time or other resources, such as space in an apartment or "room for dessert," is also important.