The Irrationality of the Rational Economic Decision-Maker
Over the last several decades, the study of behavioral economics (and the related study of behavioral finance) have chipped away at the classical model of the rational agent held dear by economists for so long.
Psychologists Amos Tversky and Daniel Kahneman of Princeton University explored a situation in an oft-cited experiment involving a theater ticket back in 1984. They told one group of subjects to imagine that they have arrived at the theater only to discover that they have lost their ticket. Would you pay another $10 to buy another ticket? they asked. A second group were asked to imagine that they are going to the play but haven't bought a ticket in advance. Then, when they arrive at the theater, they realize they have lost a $10 bill. Would they still buy a ticket?
If you are a rational agent the decision you make shouldn't depend on "how you look at it" but all too often it does. It's not as if economists didn't know this; it's just that they believed for a long time that rationality balanced out irrationality in the larger market, making it unnecessary to take such considerations into account.
Richard Thaler, at the University of Chicago, is a leader in the attempt to incorporate our understanding of human psychology and decision-making into the study of economics. He takes seriously Nobel-Prize-winner Herbert Simon's contention that human beings have "bounded rationality". He builds upon the work of psychologists Amos Tversky and Daniel Kahneman (also a winner of the Nobel Prize -- Tversky died before it could be awarded) whose work on human decision-making led them to draw a picture that -- far from being purely rational --involves shortcuts and rules of thumb and which entails adjusting their preferences as events unfold.
Other behavioral economists are attempting to understand and to incorporate factors such as human beings' tendency to procrastinate, to hate, and to ignore their own best interests. The hope is to arrive at a science of economics that corresponds much more closely with what we see in the real world.
Comments
Whence comes that which is rational and irrational in the rationale of a neo-Skinnerian, like me self.
It is convenient for me to parse the establishment of human behavior into two categories: “contingency shaped” and “rule ordered” behavior. In contingency shaped behavior a given repertory of behavior is shaped from responses that are reinforced. At the supermarket, the child comes to throw his tantrums at the checkout register next to the candy and not back in the isle next to the restroom.
Though the brat will likely figure out what is going on before mom does, his original tantrums are not a product of his figuring out a rule and following it. It is a product of the contingencies--he throws a tantrum up there in the checkout line and gets shut-up with the quick delivery of a sweet for the sweetie pie.
However, once the little beggar’s tantrums have paid off in varying settings, he will come up with the rule: raise hell under these conditions and voila, I get my way (reinforcement) when conditions are favorable. Rule ordered behavior can now emerge.
As life progresses he will be discover new rules and also be told new rules for “success,” and things start to make a lot of sense if you can make sense of a lot of things.
As this goes on, he will even be asked by his mother why he threw the cat in the washing machine, and he will be given no peace until he comes up with an explanation and say that he is sorry and will not do it again. If he just says he does not know, he will be told that it is not nice or rational to dunk the cat and that he has to think about what he is doing and be responsible for what he does—there are rules of good behavior.
So he learns that one should have a reason for doing what one does (unless you are a frigging maniac, insanity is no excuse. One should be rational like George Washington was—ever wonder why he stood up I that boat while crossing the Delaware? Probably so that he could see ahead—he was a leader you know.
So the kid learns that it is rational to be rational and that he needs to come up with an explanation for what he does--particularly when it is really dumb. To wit: “I am not going to be taken advantage of, regardless of he cost to me. I have my pride.” “I do not throw good money after bad.” “It looked good at the time.” “I had this hunch.” “How was I to know.” “It always worked before.” If you hold your mouth just right . . . “
Let us count the ways one can be irrational about being rational.