irrationality is good

It suddenly occurred to me that there are empirical regularity that in real life irrationality happens pretty often. As most people view this as a bad and prevent us from optimization, I feel this is not necessarily so. I will give two examples. I also plan to write a paper on this sometime in the future.

1) irrational expectation.

over-optimism is what I gonna start with. Perhaps, we underestimate the difficulty ahead. Given present bias, and we usually slack off because of that, this might induce behavior towards non-quasi-hyperbolic discounting framework. For this to work, I might need some sunk cost calculation.

The simplest example:

$$

\beta=0.5, \delta=1

The payoff vector is <-10,-30,P>

The classical framework: P* =4

Hyperbolic framework: P**=50.

If in period one estimation of payoff vector is <-10,-20,P>

then in hyperbolic framwork: P***=40!

isn't it beautiful?!!!!

2) mental accounting.

mental account run contrary to maximization of expected utility from a classical consumption theory. However, if we use quasi-hyperbolic discounting framework, my intuition is that adopting mental accounting imposes a disciplinary effect on consumption patter and thus makes the agent converge to classical consumption theory. My guess is that this especially works for the naive agent, and might act as a substitute for sophistication. This is likely to be more technical.

Since economics of consumption studies behavior and try to generate prediction, so comparison is difficult. so to argue that irrationality can make people better off, I need to come up with a metric. \