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Behavioral perspectives
on economic rationality
Psychologists tend to take a different approach to rationality. For example, according
to Baumeister (2001): ‘A rational being should pursue enlightened self-interest.’ This
defi nition draws attention to three crucial concepts: ‘enlightened’, ‘pursue’ and ‘self-
interest’. However, it is only a starting point, since all of these concepts need further
examination.
First, the description ‘enlightened’ implies that an individual has perfect
knowledge, something that is obviously not realistic. Sometimes the term ‘long-run
self-interest’ is employed, which is defi nitely more useful, since we will observe many
instances of confl icts between short-run and long-run considerations. However, an
even more useful qualifi cation in this context is the term ‘perceived self-interest’. Many
behavioral economists take the view that if we misjudge what is in our self-interest then
this is not a failure of rationality; it may not even be a failure of ‘bounded rationality’,
as we will explain shortly. There may be many reasons why we fail to judge what is in
our ‘self-interest’ (leaving until later a discussion of how this term can or should be
interpreted). We may have incomplete knowledge or we may have cognitive failures in
terms of the processing of information within given time constraints. These failures are
often ascribed to ‘bounded rationality’, and behavior that fails to achieve self-interest
because of bounded rationality is therefore not irrational according to this criterion.
We now need to focus on a second concept: Is pursuing the same as maximizing?
The standard model is a normative model in the prescriptive sense of achieving
optimality because it equates pursuing perceived self-interest with maximizing
expected utility. Again the constraints of bounded rationality are relevant. The work
of Kahneman and Tversky in particular concludes that people tend to take a
heuristic
approach to decision-making. The term ‘heuristic’ means that people use simple
‘rules-of-thumb’, often unconsciously, in order to make decisions when there is a lot
of information involved, much uncertainty, and a realistic time constraint. Thus we
may have a personal rule always to pay by cash for purchases of less than $100, even if
we have a credit card handy. Sometimes this can result in inconsistent or incoherent
behavior, as we will see shortly, particularly in the various examples of preference
reversals. What can be said at this stage is that bounded rationality is not concerned
with optimality, or even sub-optimality; the heuristics involved in the decision-making
processes of bounded rationality are more related to ‘
satisfi cing’.
What about cases where we misjudge what is in our self-interest even according to
the more forgiving criterion of bounded rationality? Such instances tend to relate to
the infl uence of ‘self-serving’ biases, discussed in Chapter 4. An often-quoted example
of
self-serving bias is the ‘above-average’ effect: well over half of survey respondents
typically rate themselves in the top 50% of drivers (Svenson, 1981), ethics (Baumhart,
1968), managerial prowess (Larwood and Whittaker, 1977), productivity (Cross, 1997)
and health (Weinstein, 1980). Some economists and psychologists would claim that
such acts are irrational.
We can now move on to the third concept; the term ‘self-interest’ also lends itself
to different interpretations. Economists have traditionally measured this concept in
terms of utility, where utility is a measure of subjective value. With the formalization
of rational choice theory in economics, it assumed a technical shorthand for underlying
preference orderings that obey the rationality axioms.
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There is another aspect that merits discussion in this context. Arguably, actions
where no deliberation is involved, sometimes called instinctive, are neither rational
nor irrational. These actions tend to occur on the spur of the moment, like ducking a
fl ying object likely to cause harm. Such actions are sometimes referred to as
arational.
Of particular relevance here are experiments carried out by Libet (1983 et al.; 1985;
1993). These showed that brain electrical activity occurred at a signifi cant interval
(about 300 milliseconds) before conscious willing of fi nger movements. There has
been much speculation and criticism regarding Libet et al.’s research fi ndings and their
interpretation, in particular regarding the suggestion that our sensation of conscious
will as a cause of action is an illusion (Wegner, 2002). Wegner and others hold the
view that the sensation of will is not the real cause of our actions, but is merely an
accompanying or following phenomenon, or
epiphenomenon in philosophical terms.
The implication of this would be that many or indeed all of our actions may be
arational in terms of not being caused by any kind of conscious deliberation. This is
not to assert that conscious deliberation does not take place in many cases, but raises
the possibility that, contrary to our intuitions, such deliberation merely accompanies
events rather than causing them. Wilson, Lindsay and Schooler (2000) have proposed
that we may have dual attitudes toward many things in our lives, one a rapid response
and the other a more studied reaction that takes into account the context and our
personal theory of what we ought to be feeling. Wegner (2002: 58) adds: ‘The conscious
attitude will only govern our responses when we have had time to consider the situation
and get past the automatic reaction.’
The preceding discussion introduces another factor into the consideration of
rationality: Does rationality relate just to decision-making, involving choice and
actions, or does it relate to attitudes and beliefs? In general, economists have tended to
concentrate on decision-making and actions, while psychologists have often taken the
view that, while decision-making involves deliberate choice, the formation of attitudes
and beliefs may be beyond our conscious control, and therefore outside a discussion
of rationality. If, as evidence like Libet’s experiments suggests, our decisions involving
action are also outside conscious control, then attitude and belief formation can be
claimed to be arational in the same way.
This leads us to one other view of rationality that can be considered at this point.
Sen (1990) is perhaps the best-known proponent of this view, stating:
Rationality may be seen as demanding something other than just consistency
of choices between different subsets. It must, at least, demand cogent relations
between aims and objectives actually entertained by the person and the choices
that the person makes.
It may appear that this focus on the correlation between objectives and choices has
the advantage that it no longer makes any assumptions regarding the nature of
the objectives; these are simply taken as given. Sen thus considers the nature of
our objectives to be outside the realm of rationality, on the grounds that people
are concerned with more than wellbeing and happiness. The weakness in this view
is that it takes an excessively narrow view of wellbeing. Our wellbeing does not just
include material factors, it includes psychological aspects that relate to our emotions.
Furthermore, these aspects are becoming easier to identify and measure using neural
imaging.