- Key Questions: How to make decisions under uncertainty, with multiple agents, or over time?
- Key People:
- Adam Smith (1776): Rational self-interest, not greed.
Adam Smith says: “People act in rational self-interest. They choose what benefits them the most, and society benefits too.
They make decisions that benefit themselves but can also help society.
It’s not about greed; it’s about making the best choice with available resources.
Idea: People make choices to benefit themselves, and this can help society too.
Real-life example:
Google Maps Traffic Routing:
Each driver picks the fastest route (self-interest).
Traffic spreads evenly → everyone reaches faster (society benefits).
Eg:
Rahul wants to reach college fast → opens Google Maps. Google Maps shows the shortest route. Rahul chooses it → saves his time. Many students choose optimal routes → traffic spreads evenly → everyone reaches faster. AI applies rational self-interest → one smart choice improves the whole system.
Daniel Bernoulli (1738): Expected Utility & Risk Preferences
Idea: People consider both risk and reward, not just reward.
Real-life example:
Stock Investment:
A safe bond → low return but low risk.
A startup → high return but high risk.
Investor chooses based on risk preference.
Why Economics Matters in AI
Economics helps AI answer three big questions:
- How to make the best decision when resources are limited?
- How to act when others (people or machines) also have goals?
- How to plan ahead when the future is uncertain?
Let’s break these down
1. Making smart choices: Economics teaches us how to choose the best option, like spending money wisely.
Economics is all about making decisions, especially when it comes to money.
This means Economics teaches us how to use our limited money or resources in the best possible way.
For example:
- If you have ₹100, you can’t buy everything you want.
- You must decide: Do you spend it on food, save it, or buy a movie ticket?
- Economics helps us think logically so we can get the maximum benefit from what we have.
AI Example – Limited Resources
- A delivery drone has only 1 hour of battery (limited resource).
- It has to deliver 3 packages:
- One is urgent,
- One is far,
- One is nearby but less important.
AI calculates:
- Which package to deliver first,
- Which route uses less battery,
- How to serve maximum customers before the battery ends.
Just like we decide how to spend ₹100 wisely, AI decides how to use limited battery/time wisely.
2.Dealing with others: Sometimes people have different opinions; economics shows how to consider their actions when deciding.
Figuring out what to do when others don’t agree with our choices
In real life, different people want different things.
For example, in a family, one person wants to spend money on a trip, another wants to save it.
Economics teaches how to make the best possible decision when there are conflicting opinions or interests.
In AI terms
Online Shopping Example:
Customer wants the cheapest price.
Seller wants the highest profit.
Delivery company wants to save fuel and time.
AI uses economic decision-making to:
Suggest the best price for both buyer and seller.
Choose fast but cost-effective delivery routes.
So, even when everyone’s goals are different, AI finds a solution that benefits all parties as much as possible.
3. Planning for uncertainty: We don’t know the future, so economics helps us think ahead and make decisions that are likely to give the best outcome.
Real-life Example:
You have exams next month.
You don’t know if you might get sick or have extra classes later.
So you study a little every day now instead of waiting for the last week.
This way, even if something unexpected happens, you’re still prepared.
AI Example:
- A warehouse robot needs to deliver boxes all day.
- It doesn’t know if later there might be more orders or a machine breakdown.
- So, instead of using all its battery in the morning, it:
- Works efficiently now,
Saves some battery for unexpected work later.
AI uses economic thinking: it looks at all choices, calculates benefits and risks, and picks the one with the most overall reward — just like humans decide smartly.
Suppose the robot’s goal is to collect coins quickly without crashing.
The robot has two choices:
1️⃣ Fast path
It’s quicker → gives +10 points for saving time.
But it’s risky → there’s a chance it might crash → -5 points for risk.
Net reward = +10 – 5 = +5 points → overall benefit after considering risk.
2️⃣ Safe path
Slower → gives +6 points for progress.
No risk → 0 points lost.
Net reward = +6 – 0 = +6 points → overall benefit.
Interpretation:
AI doesn’t just look at speed or safety alone.
It adds benefits and subtracts risks to see which path is better overall.
Here, Safe path (+6) is better than Fast path (+5), so the AI will choose the safe path.
AI picks the choice that gives the most overall benefit after balancing rewards and risks.
Economics teaches AI how to think like a smart decision-maker: weigh options, manage risks, plan ahead, and make good-enough choices.
In Short
| Human Economics | AI Economics |
| Spending money wisely | Managing battery, time, or data wisely |
| Making choices with others | Multi-agent systems (e.g., buyers & sellers) |
| Planning for uncertain future | Predicting and optimizing outcomes |
Economics gives AI the brain to make smart, rational, and fair decisions.
It helps AI think like a real-world problem-solver — balancing goals, managing risks, and maximizing benefits.