Economists and the Crazy Things People Do To Themselves
The following passage from St Paul's letter to the Romans is justly famous:
I do not understand what I do. What I want to do I do not do, but what I hate, I do... I have the desire to do what is good, but I cannot carry it out. I do not do the good I want to do, but the evil I do not want to do—this I keep on doing. In my inner being I delight in God’s law; but I see another law at work in me, waging war against the law of my mind and making me a prisoner of the law of sin at work within me. What a wretched man I am! Who will rescue me from this body of death?
Any one of us who has struggled to improve a bad habit knows how this feels. Human beings are crazy, self-sabotaging creatures. Who would try to deny it? Except economists. They deny it, right?
Maybe not...
The following two quotes go out to all of us who have ever wondered why economists assume that people are rational, even though, well, we aren't:
First, from Ronald Coase:
The rational utility maximizer of economic theory bears no resemblance to the man on the Clapham bus [the British equivalent of the man on the street] or, indeed, to any man (or woman) on any bus. There is no reason to suppose that most human beings are engaged in maximizing anything unless it be unhappiness, and even this with incomplete success...
[W]hatever makes men choose as they do, we must be content with the knowledge that for groups of human beings, in almost all circumstances, a higher (relative) price for anything will lead to a reduction in the amount demanded. This does not only refer to a money price but to price in its widest sense.
Whether men are rational or not in deciding to walk across a dangerous thoroughfare to reach a certain restaurant, we can be sure that fewer will do so the more dangerous it becomes. And we need not doubt that the availability of a less dangerous alternative, say, a pedestrian bridge, will normally reduce the number of those crossing the thoroughfare, nor that, as what is gained by crossing becomes more attractive, the number of people crossing will increase.
The generalization of such knowledge constitutes price theory. It does not seem to me to require us to assume that men are rational utility maximizers. On the other hand, it does not tell us why people choose as they do. Why a man will take a risk of being killed in order to obtain a sandwich is hidden from us even though we know that, if the risk increases sufficiently, he will forego seeking that pleasure.
-- The Firm, The Market, and the Law, pp 3-4
Next, from Friedman. No, not Milton Friedman, but David Friedman, spawn of Milt (ichthyology joke!):
The fundamental assumption of the economic approach, to law and everything else, is that people are rational. A mugger is the mugger for the same reason I am an economist: Given his tastes, opportunities, and abilities, it is the most attractive profession open to him...
Rationality does not mean that a burglar compiles an elaborate spreadsheet of costs and benefits before deciding whether to rob your house. An armed robber does not work out a precise analysis of how shooting his victim will affect his odds of being caught, whether it will reduce the chance by 10 percent or by 20. But if it is clear that will reduce the odds of being caught without increasing the punishment, he is quite likely to pull the trigger.
Even in this weaker sense people are not always rational. I, for example, occasionally take a third helping of spaghetti when a careful calculation of my own long-run interests would lead me to abstain. I am well acquainted with my own irrationality and can take steps to deal with it. Having discovered that bowls of potato chips located within arm's reach empty themselves mysteriously, I at least sometimes take the precaution of putting the bowl somewhere else.
But I do not know other people -- the vast masses of other people to whom economic analysis of the law is intended to apply -- well enough to incorporate their irrationalities into my analysis of the effects of legal rules on their behavior. What I do know about them is that they, like me, have purposes they wish to achieve and tend, albeit imperfectly, to correctly choose how to achieve them. That is the predictable element in human behavior, and it is on that element that economics is built.
--Law's Order, pp 8-9
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Jun '10
Re: Economists and the Crazy Things People Do To Themselves
Why would a man living in wretched squalor buy a Harley-Davidson? It happens all the time. Whether it's a trailer park in the sticks, or an urban ghetto, these places are full of luxury goods even where basic necessities are completely missing. The pursuit of status might seem irrational, but it's a major driver of human motivations. People will sacrifice comfort and safety, hearth and home, family and future, and every rational metric you can think of for a chance to impress their peers. Not rational at all, but entirely human.
Aug '10
Re: Economists and the Crazy Things People Do To Themselves
I think that part of the misunderstanding is that economists mean something a bit more like "predictable" when they say "rational" than what a lot of people might mean when they use the word "rational". In other words, the behavior can be rationally analyzed, not necessarily rationally justified. (Justification often carries metaphysical undertones, for one thing.)
Maybe it's like how physicists use the term "velocity". It's not a synonym for "speed". My mom, who's a lawyer, could never understand why not, even though she's very bright.
Edited on June 17, 2012 at 5:43amMay '10
Re: Economists and the Crazy Things People Do To Themselves
Great post.
Anyone who doesn't understand that human beings are not only rational (when they are rational at all) shouldn't be in politics.
Jul '10
Re: Economists and the Crazy Things People Do To Themselves
What's rational about dragging a dead (or fake) tree into Yer house and decorating it with balls, lights, and glitter come December?
Dec '11
Re: Economists and the Crazy Things People Do To Themselves
Pretty much all economics relies on some notion that agents are able to make rational choices. But economic rationality can be a pretty low bar. I fear any economist who thinks people are basically irrational, because they can devise an efficient cure for your shortcomings.
Aug '10
Re: Economists and the Crazy Things People Do To Themselves
Muleskinner
I fear any economist who thinks people are basically irrational, because they can devise an efficient cure for your shortcomings.
And how do economists who believe people are basically irrational design efficient cures for other people's shortcomings, since they must also assume themselves to be basically irrational?
Sure. One reason I posted these quotes is because many non-economists would probably be surprised to hear exactly how low economists set the bar for the economic presumption of rationality. I was surprised. And delighted.
How Coase and Friedman each describe the assumption of rationality reminds me of what Encyclopedia Britannica says about legal fiction:
The law uses legal fiction to function. Physics uses physical fictions, such as dimensionless points, to function. Assumptions that are literal fictions are necessary to sustain even accurate models of reality.
Dec '11
Re: Economists and the Crazy Things People Do To Themselves
Midget Faded Rattlesnake
Muleskinner
I fear any economist who thinks people are basically irrational, because they can devise an efficient cure for your shortcomings.
And how do economists who believe people are basically irrational design efficient cures for other people's shortcomings, since they must also assume themselves to be basically irrational?
It isn't a problem for me to believe that I'm rational and you're not. Economists have done this since at least Marx. He believed that capitalism produces a false consciousness that fools everyone (but Marx) into doing things that are contrary to the best interest of their class.
The minimal starting point for discussions of economic rationality is transitivity. If I prefer good A to good B, and B to C, then I must prefer A to C. This definition and a few others (assuming perfect knowledge also helps) results in demand curves that have the right shape. If people violate this, and are deemed irrational, the problem could be solved by arguing that there are too many options, and it would improve efficiency if society didn't waste resources on all of the goods currently available.
Dec '11
Re: Economists and the Crazy Things People Do To Themselves
Midget Faded Rattlesnake
Sure. One reason I posted these quotes is because many non-economists would probably be surprised to hear exactly how low economists set the bar for the economic presumption of rationality. I was surprised. And delighted.
How Coase and Friedman each describe the assumption of rationality reminds me of what Encyclopedia Britannica says about legal fiction:
The law uses legal fiction to function. Physics uses physical fictions, such as dimensionless points, to function. Assumptions that are literal fictions are necessary to sustain even accurate models of reality. · 1 hour ago
I had a professor once who proved that psychotics can be shown experimentally to exhibit rational economic behavior.
Rationality is used by economists in different ways: a useful fiction, a testable hypothesis, or a standard of behavior.
Aug '10
Re: Economists and the Crazy Things People Do To Themselves
Muleskinner
It isn't a problem for me to believe that I'm rational and you're not. Economists have done this since at least Marx. He believed that capitalism produces a false consciousness that fools everyone (but Marx) into doing things that are contrary to the best interest of their class.
I suppose under an expansive enough definition of rationality -- one apparently encompassing the definition that you as an economist actually use -- it's not irrational to believe that everyone else besides you is irrational.
But in the garden-variety way a lot of us layfolk tend to understand "rational" and "irrational", believing everyone is crazy but you doesn't sound too rational. It sounds crazy, or at the very least unreasonably arrogant.
Muleskinner
Rationality is used by economists in different ways: a useful fiction, a testable hypothesis, or a standard of behavior.
That makes sense. These are all components of good models.
Muleskinner
I had a professor once who proved that psychotics can be shown experimentally to exhibit rational economic behavior.
Having known some mentally unbalanced people myself, this actually sounds plausible to me.
May '10
Re: Economists and the Crazy Things People Do To Themselves
An act which is irrational is not necessarily unpredictable. Strategy depends upon predictability, rather than upon rational events. A strong strategy anticipates both the possibility of wise behavior and the possibility of foolish behavior (or, more likely, some combination), so that a response is ready for any event.
Much of the challenge of predicting human behavior is understanding the logic and impulses that underlie foolish choices. It's not enough to anticipate what people should do. You have to understand what people actually do and why — two separate challenges — to anticipate what they will do in the future.
And that requires the will to accept (repeatedly; anew every time) that others may choose very poorly... or very wisely. It seems to me that a lot of economic debates between bulls and bears boil down to willful optimism or pessimism. Free will is at the heart of everything, including economics.
Edited on June 17, 2012 at 8:27amAug '10
Re: Economists and the Crazy Things People Do To Themselves
Muleskinner
This definition and a few others (assuming perfect knowledge also helps) results in results in demand curves that have the right shape...
I get why it might be necessary to make an assumption (such as perfect knowledge) in order to understand why a curve is shaped the way it is (physical scientists make similar assumptions, too, after all). But given the way economists tend to remind us layfolk about knowledge costs, it sounds to me like the assumption of perfect knowledge is, like rationality, prone to causing persistent confusion.
Not that we can reasonably expect people to do better than it's possible to do. Especially not economists.
Aug '10
Re: Economists and the Crazy Things People Do To Themselves
Midget Faded Rattlesnake: The following passage from St Paul's letter to the Romans is justly famous:
And the phrase perfectly explains my golf swing.
Dec '11
Re: Economists and the Crazy Things People Do To Themselves
Midget Faded Rattlesnake
I get why it might be necessary to make an assumption (such as perfect knowledge) in order to understand why a curve is shaped the way it is (physical scientists make similar assumptions, too, after all). But given the way economists tend to remind us layfolk about knowledge costs, it sounds to me like the assumption of perfect knowledge is, like rationality, prone to causing persistent confusion.
Not that we can reasonably expect people to do better than it's possible to do. Especially not economists. · 9 hours ago
The assumption of perfect knowledge is and has been relaxed/eliminated in some economic studies. That's part of the game, relaxing assumptions and looking at the consequences, just like in hard sciences. But it pretty amazing how well an unrealistic assumption like rationality or perfect knowledge works in practice.
Dec '11
Re: Economists and the Crazy Things People Do To Themselves
During the green revolution many development economists were looking for other kinds of economic models to explain why the peasant farmers they were working with were acting irrationally and would not adopt the new seed. Theodore Schultz, an economist who knew farming and something about being poor, looked at the situation and realized that from the poor farmer’s perspective the decision not to innovate was entirely rational. The new seeds required more fertilizer, buying hybrid seeds, and more infrastructure in terms of roads to carry the inputs and credit markets to borrow money for seed and fertilizer. And if any of these things failed to materialize, they would be much worse off than before.
Aug '10
Re: Economists and the Crazy Things People Do To Themselves
Muleskinner
The assumption of perfect knowledge is and has been relaxed/eliminated in some economic studies. That's part of the game, relaxing assumptions and looking at the consequences, just like in hard sciences. But it pretty amazing how well an unrealistic assumption like rationality or perfect knowledge works in practice.
Well, that's pretty sensible. And I'd bet a lot of non-economists don't know that economists are, in fact, that sensible.
At least, a lot of folks who complain about economists' unrealistic perspective seem to assume economists aren't this sensible.
I think economics is more interesting than a lot of people seem to think it is in part because economists are more sensible about their assumptions than many outsiders would guess.
Since you're a real economist, and I'm just a groupie (I married an economist and now read books on economics for fun), I bet you could start some really interesting conversations on common misconceptions about how economic thinking works.
Edited on June 17, 2012 at 8:07pmJun '10
Re: Economists and the Crazy Things People Do To Themselves
Is it the pursuit of status, or the pursuit of an alternate reality, achieved at least for short periods of time? It's also what beautiful cathedrals are for--achieving an alternate reality for at least a couple hours on Sunday. Parishioners pay for those too.
Aug '10
Re: Economists and the Crazy Things People Do To Themselves
Allow me to counter with some Mises:
In other words, Friedman's 3rd helping of spaghetti means that he doesn't actually value his health high enough to abstain. Choosing immediate satiation over a stable waistline is still a rational choice.
Edited on June 19, 2012 at 12:26amJan '11
Re: Economists and the Crazy Things People Do To Themselves
I enjoy the conversation thus far - very insightful.
Let me throw one curve. I agree with Aaron that it isn't merely knowledge, and that it also includes the will. In the first quote, St. Paul isn't just talking about knowledge. He's talking about will. St. Paul isn't saying that he's making a mistake; he knows what he should do, but he finds himself doing otherwise. He's rational, but he goes against it anyway.
The Pauline quote hints at a spirit in the world (or flesh) that fights and subverts rationality.
Do we have a non-religious parallel? (I assume the religious already have a reply.) Is there a "spirit" that drags us away from what knowledge tells us to do? Maybe it's ...
Thomas Frank wrote "What's the Matter with Kansas?" simply to pump up his liberal ego at the expense of conservatives. It was a ridiculous conclusion ... but maybe his premise wasn't all that far off.
Maybe there is something interfering with rational thinking. Education system, anyone?
Aug '10
Re: Economists and the Crazy Things People Do To Themselves
BlueAnt: Allow me to counter with some Mises...
In other words, Friedman's 3rd helping of spaghetti means that he doesn't actually value his health high enough to abstain. Choosing immediate satiation over a stable waistline is still a rational choice.
I won't argue with that. I was hoping to convey that many reasonable people would argue with that, based on differing definitions of "rational", and tend to miss or dismiss economic arguments for that reason.
To Classical philosophers, a rational (that is, proportional) life was a virtuous life. From a psychological standpoint, rational usually means "not crazy". When that's your idea of rationality, why wouldn't you be tempted to dismiss economists, who really are willing to entertain the notion that insane and monstrous actions can be rational, as depraved or deluded people?
Even weaker claims, such as unhealthy behavior being rational, justifiably strike people as suspect, when you take into account what most people likely think "rational" means.
After all, assuming that what sounds crazy is crazy can be a rational thing, economically speaking, to do.
Aug '10
Re: Economists and the Crazy Things People Do To Themselves
One economist has posited that it's rational irrationality. Interesting, though I don't know enough to say whether it's sound.