Thursday, November 11, 2010

Pop Quiz

When governments outlaw high interest rates and the ceiling is binding,
what probably happens to the total amount of money borrowed?
a. It rises because borrowers are protected from high interest rates.
b. It falls because savers aren't willing to lend as much money at this low
interest rate.
c. Both a and b are usually true.

Far too many of my students answered c.  You don't have to know any economics to realize that this is impossible.  Yet somehow the wording of the question convinced people that the amount of money borrowed could rise and fall simultaneously.

Many of these are good students, too.  I've never understood why the humans find it so hard to do word problems.  What is it about our language that makes it so hard to see the logic embedded in a sentence?  A group of reasonably smart people, with reasonably strong incentives to think through the problem, were convinced that A=!A.*  This is a serious problem.

* The ! symbol in this context means 'NOT'.  It is a fundamental principle of logic that an argument 'A' and its opposite '!A' cannot simultaneously be true.

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