Sunday, September 12, 2010

Prologue – The Story of King Shahrayar and Shahrazad, His Vizier’s Daughter – Part I

The story begins with the king brothers, Shahrayar and Shahzaman, discovering the unfaithfulness and lewd behavior of their wives and concubines. Generalizing this to all women, Shahrayar decides to never remarry, instead instituting a custom of sleeping with a new woman every night and having her put to death the following day. From a psychological perspective, we might say this idea was insane. The king did predict, after hearing his brother’s misfortune, “I would have gone mad.” However, from an economic perspective, is this true? Was the king’s behavior irrational?

Economists define rational behavior in terms of analyzing costs and benefits. If an individual stands to benefit from a certain decision, then it’s in his own best interest to make that particular choice. The wisdom of the decision must be evaluated based on the amount and kind of knowledge the decision-maker had at his disposal.

Decisions are contextualized. A person’s worldview or belief in the validity of a particular source of information will influence the end result because it changes the way he or she evaluated expected costs and expected benefits. What we have in our story is a king deciding how to best live out the rest of his life within a belief system that says God has ordained women to cheat. Empirical evidence and a trusted authority (the demon’s wife) substantiate that belief. It’s in Shahzaman’s best interest to find a solution that allows him sexual gratification yet spares him the grief and embarrassment of an unfaithful wife.

What about the costs of such tyrannical behavior? The story doesn’t tell us the king’s expectations about the future. We might imagine that fewer marriages and births would take place as more and more women are taken to the palace. How would the king handle a demographic crisis that would weaken his kingdom? Parents might find it in their best interest to avoid the expense of raising a child and emotional attachment that will only result in pain over her death. Infanticide would skyrocket. Maybe the custom would incite the people to rebellion, or risk him being assassinated in the night.

Shahrayar might have considered these costs and valued the personal benefits more. Maybe he was too distraught to think clearly about the long-term consequences. We can only speculate, so we can’t make a firm conclusion about his economic rationality. However, it’s clear from the text that, after some considerable time, he saw no reason to change his course of action.

Conclusion: A rational decision maximizes the decision maker’s benefit, considering beliefs held and what knowledge was available at the time. Incomplete and imperfect knowledge about future costs will affect the decision maker’s ability to make certain choices. When new information becomes available after the choice is made, the decision maker may regret the action taken earlier, but that doesn’t mean it was irrational.

Monday, September 6, 2010


At first glance, the Forward to The Arabian Nights might seem irrelevant to our task at hand: To find and analyze the behavior of the characters from an economic perspective. However, this short introduction does provide some food for thought.

An author* generally operates in a monopolistic competitive market. The competitive part holds because, like in the perfectly competitive market, there are no or few barriers to entry. For example, in the United States, you don’t need a license or degree to legally conduct business as an author, unlike a taxicab driver or a physician. Anyone who gets an idea can write.

When there’s a lot of competition, each author has little market power or control over price. If one author’s book is significantly more expensive than a similar one by another author, then the first author will likely lose sales. However, there’s a way to prevent this from happening: creating an aura of having a monopoly.

“Branding,” or creating a unique product in the minds of consumers, will allow an author to exercise greater control over the price. His book might be more expensive, but his reputation as being an award-winning author or a celebrity endorsement will make it stand out from the rest. Like Pepsi and Coke, it doesn’t matter if his book really is better than a competitor’s, the author just hopes the public will think so.

So it should come as no surprise that the Forward to our text flatters the reader (“honorable gentlemen and noble readers” and “people of distinction”) and praises the author’s work (“this agreeable and entertaining book” and “splendid biographies”). The author is conducting a medieval ad campaign, hoping that it will set his work apart from the other books available.

Part of his success lies in his ability to create incentives for the public to read his book. He does this by appealing to both the practical and the pleasure-loving. He promises education and learning (“highly edifying histories and excellent lessons,” “opportunity to learn,” and “teaching [the reader] to detect deception and to protect himself from it”). Parents, seeing the opportunity to increase their children’s human capital (skills and education), would likely race to obtain the latest edition.

For those who don’t like spending their leisure time learning, however, the author promises quality entertainment (it will “delight and divert”). Real live people enjoy stories just as much as the fictitious characters, human and non-human, who narrate and listen in the book. And producing a good story has made the author’s work a continuing success.

Conclusion: To increase consumer loyalty and exercise some control over price, a producer must convince buyers of his product’s unique ability to satisfy their needs and wants.

*Since The Arabian Nights is a compilation of stories with different cultural origins that were woven together into the familiar tale we have today, “compiler” or “editor” (or the plural forms) might be more appropriate. For simplicity though, “author” will be used here.