One day, I and my colleague Heru santoso went to a Padang Restaurant, enjoy the meal very well and talk about many things. As Usual, we start a discussion. Unexpectedly, I ask this this weird stuff :
Fakhrul : Mas Santoso, do you think this restaurant make a great price combination which maximize its profit? I think the price of rendang, Ayam Balado, Dendeng and other item did not maximize its profit. How can they only make a little parity between rendang and Ikan Bakar? they lose many surplus here.
And Santoso, answer :
Santoso : Do not think too complex… In fact the owner and manager never think like you... they do not make a model or something complicated stuff in pricing decision. They just feel and decide… is this price good or not? If it gives good profit for them, they will decide and don’t give a damn to optimum condition.
After the chat, I was thinking about how I calculate something, and how naïve I am if I assume every person think and make decision with sophisticated model like I do. Lately, I found some theory that explain this condition. Herbert Simon develops Bounded Rationality on modeling this condition. He said, “There are no optimum condition, we only have satisfied condition which limiting us from searching something better”. Bounded Rationality theory said, human decision is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make decisions. This contrasts with the concept of rationality as optimization.
So, Does assuming every person is rational and searching for optimu condition is right?
Source : Picture from Mightywombat.com
3 comments:
The absence of models does not imply the absence of maximization as a goal.
The chef/restaurant owner's perception of "the right price" is, in fact, their perception of the profit maximizing price. They don't make "sophisticated" calculations using a model, but they already have a sense of the demand curves they face. They know that charging an extra 10 thousand rupiah for ikan bakar will cause demand to drop to zero. Profit maximization does not imply the same profit margin for every single item.
Bounded rationality applies to a one-shot scenario, but when you consider that these vendors have been selling their dishes for months, or even years, the amount of information they have regarding their product, their target market, and their profit margins can be used to create a profit-maximizing scenario in the long run.
Just because you think the food is cheap doesn't mean it's not profit-maximizing. =P
yes...fik...
My point is, not everyone has similar knowledge and perfect knowledge about maximizing something...
In the long run, yes... every person will have perfect information and will do optimization...
But, in some case which i ever see, there are many people that do not have good sense on profit maximization ( i think it is the problem of education, intelligence and something like that...I believe i can get more profit and beat them in business)
Simply, it is about different information that every person have,,,
In strategic behaviour, "Rational People" do not need to assume that they face rational people also (in this case)... They have to count what kind of information their competitor have?, and how smart they are?...
games of imperfect information will explain it clearly...
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