Rod Long's Non Sequitur
By Bryan Caplan
I just noticed this comment by philosopher Rod Long:
As a wise man once said: when the price of irrationality is low, people
buy more of it. My suggested corollary is that when the price of
irrationality is difficult to determine, people likewise buy more of it.
Kudos for the wise man :-), but the second sentence doesn’t follow. In fact, it’s wrong. With risk-averse agents, price uncertainty reduces demand. Consider: When a product doesn’t have a price tag – and no one will tell you the price – does that make you more likely to buy it?
P.S. I think Knightian uncertainty is incoherent, but I realize that many people behave differently when they face what seems like Knightian uncertainty. But this won’t save Rod. The literature on “ambiguity aversion” finds that the perception of Knightian uncertainty makes people act more risk-averse, not less.