Does it make sense to consider people rational actors, in the economic sense? Rational action, as I understand it, is defined as a person taking into account the costs and benefits and making decisions based on a comparison of the two that doesn’t put them at negative value. People make “smart” decisions in that they choose things that benefit them given the costs.
However, I have also heard it stated that even people “being irrational” – as in, doing things for others at no apparent benefit to themselves – is still covered under the rational action premise. Those people are gaining internalized benefit – happiness at helping others – that necessarily outweighs the costs of their action.
The issue I have with this latter philosophy is that it seems rather circular. Here is an example: I am interested in a girl, but she is not interested in me but wants to be friends. She comes to me for advice about another guy she likes, and I help get them together. Is it rational in the sense above, that I am gaining benefit by helping my friends? I believe so, but often not that outweighs the anguish of the moment. People make decisions like these, putting themselves in a negative benefit situation now for some potential happiness down the line. Does economics claim to be predictive in cases like this? It seems foolish to think that without a detailed psychological analysis of the individuals in question, one can predict this apparently self-detrimental behavior.
I think humans are capable of being irrational locally (in the moment) to be rational in the extended sense. By this, I mean that you can consciously (and sometimes unconsciously) take a local hit – costs outweighing benefits – for a global increase in your happiness. The best example of this in my experience is making oneself moderately unhappy (spending time ignoring one’s own needs and wants) to make a friend much happier. One could imagine an even more extreme example, like asceticism – giving up worldly benefits for some potential intangible mental/spiritual benefit later. For economics to be predictive, I believe it needs to incorporate the nature of extended rational action.
#1 by Erik Lauer on 2010/02/08 - 11:14 PM
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I think it is a reasonable model, if the goal is to measure preferences. And given those preferences, a model can be predictive for the future. Using the data to measure the preferences and the preferences to predict the same data is circular
Deferral of gratification is a trait more common amoung educated and successful people. I think it is fair to put such actions under “rational”.
#2 by Gregory on 2010/02/09 - 12:10 AM
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Most of the recent books on economics (like Predictably Irrational) are about exactly this – Nash era economics treats people like rational actors, but really they’re quite irrational. So no we try to combine the rational actors economics with just enough psychology to get a more accurate model.
Now what you’re specifically talking about here sounds more like moderately circular self-delusion. The self-sacrificing stuff to help others, and asceticism, and similar things seem to fit two major models (to me):
1) Some people really feel great when they do those things. Not all people do, so trying to explain the costs and benefits will feel forced or wrong to others, but for those people the benefits really are better.
2) Some people want so badly to be “good” people that they self-sacrifice and self-delude themselves into these behaviors. For them it’s more complex, but some of them are happier overall because the semi-masochistic things they do achieve their goal of being “good” and that (and especially the feedback from others telling them how good they are) really does make them happy.
Note that also shows the difference in the two. 1s don’t need praise from others but 2s do. Either way, they’re awfully nice people, so I like them.
#3 by Pete Storm on 2010/02/09 - 5:53 AM
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Part of the problem is trying to define the costs and benefits. There’s no real standard. I derive benefits in ways quite different from others, so things I do things that look “objectively irrational” to them, but are quite clear to me.
I think helping others often falls into a “savings account” mentality. If you help others out, someone will be there when you need help. Maybe not the same person you helped, but someone.
#4 by Nate Austin on 2010/02/09 - 12:08 PM
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I’ve completely given up on rationality. It’s amazing that we’re able to approximate it under certain carefully controlled conditions, if we are well fed, safe, calm, etc.. And while we can, and maybe should, aspire to rationality, I think it’s problematic to assume that we ourselves act rationally, or to assume that others do.
Let me give you an example. Today I had to go in to the DMV because my driver’s license had expired, and my car registration had expired, and I got a fix-it ticket regarding the latter. This is all stuff that I could have taken care of in a timely matter, but I didn’t. I just kept putting it off until it came back to slap me in the face.
I know that you might say that I was trading convenience in the moment for trouble down the road, but I don’t think that accurately reflects my decision making process, because I could have told you, at any point, that I was making a bad decision by putting it off. In other words, I didn’t take a path that increased my net happiness. And I think this is a very common type of story.
So, if what you’re after is a model of how we make decisions, I think you’d do better to start with psychology and add a strong layer of numerical simulation, and use that instead of classical economics.
And in conclusion I want to leave you with this semi-emo blog post / lore bit I wrote on a somewhat related topic: http://genericlore.blogspot.com/2010/01/dogs-who-wish-to-be-birds.html
#5 by Nate Austin on 2010/02/09 - 12:08 PM
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PS I love that you’re blogging about all this kind of stuff, I really miss these discussions.