DisruptiveInnovation.Org - Latest Discussions

On Preference and Choice: Do We Need a More General Theory of Microeconomics?

Spencer Nam, 4/25/2016

The field of microeconomics is primarily concerned with consumers and firms making decisions on allocation of limited resources.

The current microeconomic theory is built on consumer’s decision making based on their inherent preferences and their ability to make rational choices given limited resources. Individuals’ choice behaviors are largely dictated by their recognition of utility and how each individual maximizes utility relative to available resources. When we consider the theory of disruptive innovation in the context of the principles of microeconomic theory, however, we cannot overlook an important claim the disruption theory provides that is seemingly contradictory to basic microeconomics theory based on preference and choice. In disruption theory, we assume that the circumstance, not individual preference, dictates how consumers make decisions on resource allocation.

This remarkable observation made by Clayton Christensen that circumstances dictate individual decision making, not the preferences inherent to humans, marks a potentially significant introduction to a new paradigm that might enhance our understanding of individuals’ behaviors. In fact, when we abstractly think about what preference really is, it is unclear how much of it is inherent to the fabric of our existence and how much is dictated by the circumstance we’ve been placed in. Is our preference for corn over wheat, for example, just a random preference or circumstance-driven programmed response? Do we prefer red over green, because of red’s longer wave length or some environmental indoctrination? These questions become even more difficult to answer when we consider these abstract preferences in the context of purchasing decisions.

In fact, it is clear that microeconomics theory does not attempt to explain where individuals' preferences come from or how preference is influenced. It just assumes that preference is an inherent quality that drives our decision making. But, just as the scientists discovered that the earth was rotating around the sun instead of the sun rotating around earth, Christensen’s supposition that circumstance drives resource allocation decisions must be explored more closely, as it is an alternative explanation that can explain many of these behavioral phenomena without the uncertainty of how preference really operates inside a brain.

Let’s do some more abstract exercise. What would happen if each individual existed in a set of circumstances that created various strengths of needs on individual? This is as simple as imaging a person in the middle of nowhere, looking for food because she is hungry. If the pain of hunger is enough, she would be highly willing to choose food. But if she is not feeling hunger, seeing food in front of her might not create much interest. The circumstance of hunger is clearly driving the choice behavior. Thinking along this way, we can quickly see how the entire theory of microeconomics could be rewritten from the perspective of circumstances. In fact, it is not the individual being at the center of the economic universe, but the space of circumstances act on individuals as a field that exerts force on individuals depending on time and situation.

Can this model then explain demand and consumption? How utility can be explained in this context? While answers to some of these questions need to be fleshed out more thoroughly and rigorously, it is clear that circumstance-driven economic model, where the “space of potential needs” is the constant factor instead of individuals and their preference, might be a more robust model to describe consumption behaviors of individuals and firms. In fact, it appears that the special case of this more general economic model is what we describe as current microeconomic theory.

We will be using this disruption website to provide incremental insights into this matter. In coming months, we will try to reexplain/repostulate the current microeconomic theory from the perspectives of circumstance instead of individuals.