Indifference point

A friend of Café Salemba, Irma Kurniawan offers her thought on indifference point. Irma has been studying psychology at Universitas Indonesia, University of Queensland, Oxford University, and University College London. Her PhD research is on the neuroscience of action choices.

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Indifference point: what does it mean?
by Irma Kurniawan

Paul Glimcher, a leading neurophysiologist/neuroeconomist, has given a 4-day visit at the Functional Imaging Laboratory, London this week and we had the privilege of listening to him give a series of informal lectures about classical economics axioms in Expected Utility Theory, and how these should be implemented in studying neuroeconomics. One thing he mentioned a lot was the notion of indifference point; a point where the (expected) utility between two (bundles of) goods are equal. Now, my impression is that economists think this as a point where buyers are indifferent between two objects and that the two are equally preferred. What this actually mean, cognitively, isn’t clear. Does this mean one is merely indecisive? Or one simply doesn’t care (indifferent) when given two goods that are of equal value to her? Would she let someone else choose for her at random in this situation? Or is there an unknown choice-making feature at the point of indifference that we haven’t discovered yet?

I don’t know enough about economics to say how economists would derive an indifference point empirically. In psycho/neuroeconomics, indifference is indicated when after 100 times of choosing between bananas and sausages, subjects chose bananas almost 50% of the time. This means that subjects would choose a banana on one choice trial and a sausage on the next trial, and that the indifference is only observed in the proportion of choosing each option across all trials (I also wonder whether this violates transitivity of choices, but let’s not talk about this yet!). One might then ask, at any single trial, what drives a subject to choose one over the other? Is this simply noise in the choice-making process? Did she choose randomly?

If the two goods are indeed of equal (subjective) value to her, might it be that this particular choice is a difficult choice such that she doesn’t know which one is better and which one she should choose? This is a plausible explanation. Psychologists would predict that people take longer to decide between options that are of equal (subjective) value to them, than to decide between 1 preferred object and 1 less-preferred object. This may suggest that they are engaged with more cognitive (i.e., thinking) process before making such a choice.

If this is true; if indifference at all indicates difficulty of a choice, does this mean subjects are engaged with a higher dose of ‘cost-benefit analysis’? Even if we fail to observe reaction time differences between choosing equally-valued products and choosing unequally-valued products, can we still make inferences about how much ‘cost-benefit analysis’ one is engaged with? Could we find a cost-benefit metric that can gauge how much analysis one is making about the values of each good?

Why care? Economists might not care what indifference actually means psychologically. Is it people’s indecision, difficulty in making such choices, or is there an underlying loss-gain analysis element in these decisions? If we know what it means for one to be indifferent, we’re able to identify underlying parameters for indifference and make stronger predictions about one’s future choices.

PS: Bautista et al., PNAS, 2001 have made this attempt to parameterise birds’ critical factors for choosing to fly or to walk (after establishing the indifference point between walking and flying).