by W. Brian DillAn Economic Perspective on why
we make the decisions that we do
|A formalization of my theory about the choices that one should make when
consuming goods. This is my first draft, and will likely be modified as I get a better
understanding of how to more clearly articulate my ideas.
After reading this, it would probably not surprise you to learn that I was an Economics major (B.A. from Mississippi State, M.A. from Univ. of Alabama), however my chosen profession lies in the world of computer technologies. At any rate, here lies one of my contributions to society in the form of academic endeavor.
Mediocre Theory Explained
If you can't afford the "best" version of an item, you are best off buying the "cheapest" version of that item instead of the mediocre version. The reason is that if you buy the mediocre product, it will suffice you, but you will not totally be happy until you have the "best" version of the item.
If you buy the mediocre version you are still not totally satisfied, but now it is more difficult to make the leap to buy the "best" version because the marginal increase in quality is harder to justify the expense of the "best" version.
If, however, you buy the cheapest version - in fact a nearly disposable version - then you are still not satisfied (because its not the "best"), but you know that it is definitely only a temporary solution until you can afford the "best". Also, it is easier to justify the expense of the "best" version because the marginal difference between the cheapest version and the "best" version is much larger.
Definition of "Best"
In this model, the term "best" does not necessarily indicate the absolute best product on the market, but rather what is "best" to the individual - the level at which they are totally satisfied with the product. For example one could easily argue that a Lexus is NOT the "best" car on the market, but for me that would be the "best" because if I had a Lexus, I would be 100% satisfied, and I would have no desire to have a car of higher caliber.
Exceptions to the Rule:
There are instances in which the mediocre theory does not apply. These instances have specific characteristics.
Case Example: The Stereo
As mentioned earlier, the "best" is relative to the consumer of the item, so lets create an example for illustrative purposes. Lets say that the "best" version of a stereo for Joe is an $1,800 Sony system with Bose surround sound speakers. Joe does not have the necessary funds to get the "best" system, but he could swing $600 for one of those mini all-in-one systems (the mediocre). His other option would be to get a CD Jam box for $120 (the cheapest).
Lets assume that Joe is unwilling to go into debt for a luxury item such as a stereo (good decision). Joe then has two choices: the mediocre all-in-one system, or the cheap jam box.
Initially Joe would be happier with the mediocre system because it would produce a much better sound than the cheap jam box, however he would be left in no-man's land when it came time to get the "best" system. He's already spent a whopping $600 for a system that sounds OK, so forking over another $1,800 for the "best" system that sounds a little better is hard to justify. Plus, what does he do with the old system? He could resell it, but at a severely devalued price.
But if Joe got the jam box, then he would have poor sound initially, but he would have the satisfaction that he knew that it was only a temporary solution. He would definitely be getting his "best" system before too long. Plus he could easily justify the $1,800 because he would be getting a quantum leap in sound quality. This particular example is extra nice because after he got the "best" system, he would have a nice portable jam box which he could get further value from even after he got his "best" system, which is not the case for the mediocre all-in-one system.
Before one makes a non-trivial purchase, he should access his financial standings and determine if he is in a position to purchase the "best" of that item that he can. If the answer is "no," then he should seriously consider purchasing the cheapest "get-me-by" version of that item instead.
Do you agree? Do you think I am full of crap? Let me know what you think. I welcome your thoughts.