Answer to Question #211509 in Economics for Sareena arbab

Question

1. Some managers are known for their reliance on “practical” decision-making rules and 

processes, and they can be quite skeptical of decision rules that seem too theoretical to 

be useful in practice. While it may be true that some theoretical methods in economics 

can be rather limited in their practical usefulness, there is an important corollary to 

keep in mind: “If it doesn’t work in theory, then it won’t work in practice.” Explain the 

meaning of this corollary and give a real-world example (Hint: see “Some Common 

Mistakes Managers Make”).

Answer 1

Part of the answer lies in the fact that economics is an imprecise science. There are exceptions to any pattern of behavior that economists take for granted. For example, they believe that as the price of a product rises, demand for it falls. But even undergraduate economics students remember the “Giffen paradox,” breaking the mold. When bread becomes more expensive, the poor buy more because they have to save on more expensive products.

Economic behavior is a complex phenomenon: it depends on individuals, time, goods, and cultures. To predict what will happen to a gas when pressure changes, physicists do not need to know about the behavior of each molecule. Economists cannot afford such generalizations. In some cases, individual behavioral deviations are leveled, which makes the crowd more predictable. In others, people influence each other so strongly that they turn into a herd, led by several individuals.