Four Principles of Individual Decision Making

Principles of Individual Decision-making

In life, we have to make a decision just about everything that we do. These decisions affect our daily lives and they sometimes they affect the lives of those around us. When making these decisions there are make factors that go into making a final one. In economics there are four principles that effect how a person makes a decision.

List of four principles of individual decision making.

• People face trade-offs.
• The cost of something is what you give up to get it.
• Rational people think at the margin.
• People respond to incentives.

These four principles play an important role in economics. This paper will define each individual principle and then give the rater an insight on a personal decision of the author using the aforementioned principles.

People face trade-offs.

Making a trade-offs is basically, choosing one thing over another. As modern technology advances, one could argue that society has traded-offs battery life in personal electronics for a smaller size and weight of the individual device.

The Cost is What You Give Up

After you have looked at what is being traded-offs, then you can determine the true value of your decision by what you are giving up for it. As in the previous example of personal electronics, giving up battery life has a serious downside in that the personal electronic device will have to charge. Here the cost can be a great one to a person that is constantly on the go.

Rational people think at the margin

Being rational means that an individual will do all that they can to achieve their goal with all that they have available to them. A rational personal thinking at the margin or on the edge will be able to make decisions that allow them to achieve their goal without giving up to much in overall cost. Going back to the personal electronic device, an individual could choose to go with the smaller and more lightweight device because of its portability, but they’ll bring along a portable charging device also, or use the product more sparingly to make the most of the available battery power.

People respond to incentives

An incentive can be carried to something positive like a benefit or something negative like a consequence. Incentives can be a large part of an individual decision making process. The incentive that an individual would most likely respond to when choosing the new personal electronic device would be that they are carrying around less weights, therefore making them more mobile. The consequence side that would affect the decision would be rooted in the fact they will not be able to use the device as much as they would like.

Conclusion

In an economy there are four principle that are vital to the decision making process of how it will distributes its resources. The first is Trade-offs, giving up one thing for another. Then the determination of the cost of what you are giving up to get to your goal. Third, is the thought that rational people think at the margin, meaning one will take advantage of all opportunity to achieve one’s goals. Finally, the principle that people respond to incentives, assists in determining the quantity or price of a certain resource. These principles are also applied in individual decision-making, and the results can affect more than just an individual but an entire economy.