Thoughts on economics and liberty

Are we rational or irrational?

Below is an extract from the draft manuscript for DOF. I have mulled over various issues and arrived at the view that we are self-interested, hence rational. It might conflict many observations of reality, but it is a better assumption to make than one of human irrationality. I seek comments on this, should you have evidence either way. 

Which part of our brain predominates?

Despite enormous computational capacities of the human brain, its perceptual and cognitive capacity, and capacity for good judgement, is not unlimited. The higher brain does not always dominate in our actions. I’m not talking about simple things like optical illusions, but about serious ‘failures’ of judgement. The sciences of neuropsychology and neuroeconomics are at the frontier of such analysis. In their Nobel Prize winning studies, Kahneman and Tversky found that we can draw erroneous conclusions based on the different ways in which information is presented. These include the biases of anchoring, availability, framing and representativeness. Other biases include the base rate fallacy, conjunction fallacy, loss aversion, peak-end rule, preference reversal, status quo bias and fundamental attribution error. Thus, a recent study demonstrated that we make systemic errors in purchase decisions that are framed as special deals.[1] In addition, we easily slip into logical fallacies. Our mind doesn’t necessarily think as rationally as it could, once properly trained to spot errors of reasoning.
[For an excellent overview of these and other human biases, and to find why our decisions are often flawed, I suggest Jason Zweig’s book, Your Money & Your Brain (2007), and Nassim Nicholas Taleb’s at times very wrong but also at other times insightful books – Fooled by Randomness (2001) and The Black Swan (2007).]
Rephrasing some of the situations in a more natural or ‘intuitive’ manner has been shown to overcome at least some of them[2]. In other cases, it has been shown that such failures of rationality only occur under new circumstances. People arrive at the rational solution after a while and don’t repeat earlier mistakes. It is therefore not sufficient to use this information as a basis to argue that we are irrational. Indeed, the concept of rationality itself needs to be better understood.
The way we are designed, emotion sometimes triumphs reason. For instance, many of us don’t invest in shares even though over the long run it is almost certain that these will yield the highest return. We are afraid of the low probability of loss than excited about the pleasure we might feel with a gain. Loss aversion is the sinking feeling in our guts when we lose money, no matter how little. To avoid that feeling we take the seemingly irrational option of investing in bonds instead of shares. Rationality can’t be narrowly construed in terms of a simplistic equality of loss and gain. When the crunch comes and we are at the receiving end of loss, then all concepts of probabilities become irrelevant. The loss is uniquely ours and we, individually, suffer the consequences – consequences that can sometimes be fatal. In the evolutionary sense we are far better off by eliminating losses, before indulging in pipedreams. Of course, with good education in economics, we might agree to take carefully calculated risks. Rationality must work in tandem with emotion to yield the most satisfactory outcome for emotions are often rational in the evolutionary sense (which, arguably, is far more important than mere ‘logic’).
Our lower and mid-brain can, of course, in moments of extreme emotionality, lead us dangerously astray, even to suicide. We remain the only animal known to take its own life, albeit rarely. Miasmas that beset us include worries (real or imagined), self-consciousness, and stress. As a result, advocates of hatred have a gala time. Our rational mind is easily overpowered by fears. But that does not deny the self-interested rational underpinnings of our behaviour in most cases. I know that my ‘faith’ in reason is challenged everyday when I look around the world. But if we restrict the meaning of rationality to an attempt to be reasonable in achieving one’s self-interest, then almost all human behaviour is rational.
Note, too, that rationality does not require perfection. A demand that we must arrive at the right answer if we are ‘truly’ rational is like asking why don’t tennis games go on for ever, because in a perfect world no one should ever return the ball badly and anticipate the other player’s returns. Reason, or rationality, is not a guarantee of truth. We can reason wrongly – but that is still a kind of reason!
Our cerebellum undertakes fine-tuned movements by (unknown to us) making enormously complex mathematical calculations that would defeat all known computers. So also our behaviour is often driven by an underlying calculation or reason – at times a reason that is deliberately hidden from us by our brain. For instance, Gerd Gigerenzer believes that ‘love at first sight’ is a rational solution to the problem of finding a mate, by preventing us from undertaking a seemingly rational search for partners that often becomes counter-productive, and hence harm our evolutionary chances. A good example he gives is of Kepler who, in 1611, ‘after an arranged and unhappy first marriage, …began a methodical search for a second wife.’ He ‘‘investigated eleven possible replacements within two years. Friends urged him to marry candidate number four, a lady of high status and a tempting dowry, but he persisted with his investigation. Insulted, this suitable match rejected him for toying with her.’[3]
Those familiar with dynamic programming know that finding a solution to the simple ‘parking problem’ (namely, deciding whether to park in the first empty spot or to move on and look for a spot closer to one’s destination) can quickly become mathematically intractable. The problem of marriage is effectively a two-sided parking problem, with both sides searching for a match (place to park), and with significantly greater uncertainty in the relevant parameters (including strategic gaming). Even the rational solution might turn out – once we have done the maths – to be to decide within the first three or four marriage opportunities. Either way, humans tend to marry within the first few partners they investigate, with ‘a third of Americans born even as recently as the 1960s and early 1970s’ marrying their first partner[4].
In particular, it can be supra-rational to ‘fall in love’ and deliberately block so-called rational thinking, which can only create doubt. We might never even know that we have blocked all other options off! The fact is that if we were purely rational we could never marry, beset by permanent doubt. Hence we would never reproduce. Therefore, [o]ften what looks like a reasoning error from a purely logical perspective turns out to be a highly intelligent social judgment in the real world’[5]. Supra-rational decisions (like falling in love) are whole-body-mind rational methods to enhance survival. Often our ‘gut feelings themselves have a rationale based on reasons’[6]. Unconscious reasoning (implicit rationality) is often at the heart of rapid-fire gut feeling.
Consider another rational fact – that time has value. Teenagers know that the fun they are having won’t come back again, so they ignore calls to forego this fun. That doesn’t mean they are irrational: just that they prefer a bird in hand to two birds in the bush. Indeed, once time is taken into account, the implicit rationality of many of our decisions becomes even more evident – particularly when we account also for our (hidden) personal knowledge of our local circumstances. Since deliberate rational thought takes time, it is not suitable for most day-to-day decisions. People rationally take imperfect decisions on minor matters. Our mid-brain also ‘observes’ many things subliminally – things that do not register on our conscious brain: hence we are using whole-body ‘knowledge’ when we decide on most matters.
By now a large stream of literature, including the seminal work of Gary Becker, demonstrates that major aspects of individual behaviour can be best explained by assuming self-interested rationality, even though, on the surface, no such rationality might be evident. The behaviour of drug addicts, criminals (and even animals in some cases) has been shown to abide by the predictions of rationality. Standard economic models therefore continue to provide great value. [An excellent discussion is provided in David M. Kreps’s introduction to his 1990 A Course in Microeconomic Theory.] Models of rational choice are always aware of their limitations – that they do not perfectly predict human behaviour. Those who have convincingly demonstrated the predominance of rationality include: Steven Levitt and Stephen J. Dubner’s [Freakonomics (2005) and SuperFreakonomics (2009)] and Tim Hartford [The Logic of Life (2008)].
The standard rational choice model therefore remains the best way to investigate human behaviour. Taleb is wrong when he says that: ‘Legions of empirical psychologists of the heuristics and biases school have shown that the model of rational behaviour under uncertainty is not just grossly inaccurate but plain wrong as a description of reality’.[7] He is wrong because rational choice models are an approximation of what human behaviour if likely to be. Rationality is not a claim on perfection but of self-interested optimisation subject to one’s local circumstance. A decision that is perfect and accurate in retrospect (and for ever after!) is not the standard of human rationality. I therefore assume in this book that despite the complexity of the human brain and its limitations, humans are predominantly rational and strategic.
            Noting that, we must also acknowledge that our brain is a two-edged sword. With the motivational engine of emotion but an imperfect ability to think and plan, we are led to heroic deeds and great poetry, or, at times, to terrible crime. Chimpanzees can’t inflict the harm that humans can inflict with atom bombs, but so also they can’t build skyscrapers or write sonnets. Without emotion, all the romance, drama, poetry, art and ‘colour’ will drain out of our lives, making us an insipid and boring package. But we remain capable of justifying everything.[8] We are a unique entity, with potential both for good and for evil. Political principles must recognise and build on this confounding complexity of the human situation. 


[1]The Impact of Price Frames on Consumer Decision Making”, Office of Fair Trading, UK May 2010 [http://www.oft.gov.uk/shared_oft/economic_research/OFT1226.pdf]

[2]Pinker, Steven, How the Mind Works, London: Penguin Books, 1999, p.343-348.

[3] Gigerenzer, Gerd, Gut Feelings, London: Penguin, 2007, p.58.

[4] Gigerenzer, Gerd, Gut Feelings, London: Penguin, 2007, p.54.

[5] Gigerenzer, Gerd, Gut Feelings, London: Penguin, 2007, p.103.

[6] Gigerenzer, Gerd, Gut Feelings, London: Penguin, 2007, p.192.

[7] Taleb, Nassim Nicholas, The Black Swan, London: Penguin Books, 2007, p.185.

[8] In this category would be the ‘extreme rationality’-based thinking attributable to Hegel, Nietzsche, Heidegger: the kind of thinking which ultimately created Hitler. Evil does not believe it is evil. Sometimes evil does not even agree that there are values.

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2 thoughts on “Are we rational or irrational?
  1. Sonia Jaspal

    One person's rationality is another person's irrationality. Even murderers think they are being rational.

     
  2. Sanjeev Sabhlok

    Dear Sonia
    If we are unable to determine what is rational we are basically finished as a species. Everything in life will become ad hoc
    I'm not that pessimistic about humanity. The average jury can determine whether a murder was rational or not. In some cases mitigating circumstances (reasons: hence rationality) might mean a lower punishment, even a manslaughter charge. The key to this is objectivity, that if one applies one's mind to the facts, then we will all come mostly to the same conclusion. That is the basis of all scientific advance and critical thinking.
    Regards
    Sanjeev