rationality

Thaler’s Non-Revolution in Economics

James R. Rogers writes about Richard Thaler and behavioral economics:

[M]edia treatments of Thaler’s work, and of behavioral economics more generally, suggest that it provides a much-deserved comeuppance to conventional microeconomics. Well . . . Not quite….

… Economists, and rational choice theorists more generally, have a blind spot, [Thaler] argues, for just how often their assumptions about human behavior are inconsistent with real human behavior. That’s an important point.

Yet here’s where spin matters: Does Thaler provide a correction to previous economics, underscoring something everyone always knew but just ignored as a practical matter, or is Thaler’s work revolutionary, inviting a broad and necessary reconceptualization of standard microeconomics?…

… No. He has built a career by correcting a blind spot in modern academic economics. But his insight provides us with a “well, duh” moment rather than a “we need totally to rewrite modern economics” moment that some of his journalistic (and academic) supporters suggest it provides….

Thaler’s work underscores that the economist’s rationality postulates cannot account for all human behavior. That’s an important point. But I don’t know that many, or even any, economists very much believed the opposite in any serious way. [“Did Richard Thaler Really Shift the Paradigm in Economics?“, Library of Law and Liberty, October 11, 2017]

I have made the same point:

Even in those benighted days when I learned the principles of “micro” — just a few years ahead of Thaler — it was understood that the assumption of rationality was an approximation of the tendency of individuals to try to make themselves better off by making choices that would do so, given their tastes and preferences and the information that they possess at the time or could obtain at a cost commensurate with the value of the decision at hand.

Highly recommended reading: my previous post about Thaler and the many related posts listed at the end of it.

Altruism, Self-Interest, and Voting

From a previous post:

I am reading and generally enjoying Darwinian Fairytales: Selfish Genes, Errors of Heredity and Other Fables of Evolution by the late Australian philosopher, David Stove. I say generally enjoying because in Essay 6, which I just finished reading, Stove goes off the rails.

The title of Essay 6 is “Tax and the Selfish Girl, Or Does ‘Altruism’ Need Inverted Commas?”. Stove expends many words in defense of altruism as it is commonly thought of: putting others before oneself….

… Stove’s analysis of altruism is circular: He parades examples of what he considers altruistic conduct, and says that because there is such conduct there must be altruism.

I went on to quote an earlier post of mine in which I make a case against altruism, as Stove and many others understand it.

Stove’s attempt to distinguish altruism from self-interest resurfaces in Essay 8, “‘He Ain’t Heavy, He’s my Brother,’ or Altruism and Shared Genes”:

And then, think how easy it is, and always has been, to convince many people of the selfish theory of human nature. It is quite pathetically easy. All it takes, as Joseph Butler pointed out nearly three centuries ago, is a certain coarseness of mind on the part of those to be convinced; though a little bad character on either part is certainly a help. You offer people two propositions: “No one can act voluntarily except in his own interests,” and “No one can act voluntarily except from some interest of his own.” The second is a trivial truth, while the first is an outlandish falsity. But what proportion of people can be relied on to notice any difference in meaning between the two? Experience shows very few. And a man will find it easier to mistake the false proposition for the evidently true one, the more willing he is to believe that everyone is as bad as himself, or to belittle the human species in general.

Therein lies the source of Stove’s confusion. Restating his propositions, he says it is false to believe that a person always acts voluntarily in his own interest, while it is (trivially) true to believe that a person always acts voluntarily from an interest of his own.

If a man’s interest of his own is to save his drowning child, because he loves the child, how is that different from acting in his own interest? There is “a part of himself” — to put it colloquially — which recoils at the though of his child’s death. Whether that part is love, empathy, or instinct is of no consequence. The man who acts to save his drowning child does so because he can’t bear to contemplate the death of his child.

In sum, there is really no difference between acting in one’s own interest or acting from an interest of one’s own.

It isn’t my aim to denigrate acts that are called altruistic. With more such acts, the world would be a better place in which to live. But the veneration of acts that are called altruistic is a backhanded way of denigrating acts that are called selfish. Among such acts is profit-seeking, which “liberals” hold in contempt as a selfish act. But it is not, as Adam Smith pointed out a long time ago:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. [An Inquiry into the Nature and Causes of the Wealth of Nations, 1776]

The moral confusion of “liberals” (Stove wasn’t one) about matters of self-interest is revealed in their condescension toward working-class people who vote Republican. I have pointed this out in several posts (e.g., here and here). Keith Stanovich takes up the cause in “Were Trump Voters Irrational?” (Quillette, September 28, 2017):

Instrumental rationality—the optimization of the individual’s goal fulfillment–means behaving in the world so that you get what you most want…. More technically, the model of rational judgment used by decision scientists is one in which a person chooses options based on which option has the largest expected utility…. [U]tility refers to the good that accrues when people achieve their goals….

More important for discussions of voter rationality, however, is that utility does not just mean monetary value…. For instance, people gain utility from holding and expressing specific beliefs and values. Failing to realize this is the source of much misunderstanding about voting behavior….

Failure to appreciate these nuances in rational choice theory is behind the charge that the Trump voters were irrational. A common complaint about them among Democratic critics is that they were voting against their own interests. A decade ago, this was the theme of Thomas Frank’s popular book What’s the Matter with Kansas? and it has recurred frequently since. The idea is that lower income people who vote Republican (not necessarily for Trump—most of these critiques predate the 2016 election) are voting against their interests because they would receive more government benefits if they voted Democratic….

[L]eftists never seem to see how insulting this critique of Republican voters is. Their failure to see the insult illustrates precisely what they get wrong in evaluating the rationality of the Trump voters. Consider that these What’s the Matter with Kansas? critiques are written by highly educated left-wing pundits, professors, and advocates…. The stance of the educated progressive making the What’s the Matter with Kansas? argument seems to be that: “no one else should vote against their monetary interests, but it’s not irrational for me to do so, because I am enlightened.”

As I say here,

it never ceases to amaze the left that so many of “the people” turn their backs on a leftist (Democrat) candidate in favor of the (perceived) Republican rightist. Why is that? One reason, which became apparent in the recent presidential election, is that a lot of “the people” don’t believe that the left is their “voice” or that it rules on their behalf.

A lot of “the people” believe, correctly, that the left despises “the people” and is bent on dictating to them. Further, a lot of “the people” also believe, correctly, that the left’s dictatorial methods are not really designed with “the people” in mind. Rather, they are intended to favor certain groups of people — those deemed “victims” by the left — and to advance pet schemes (e.g., urban rail, “green” energy, carbon-emissions reductions, Obamacare) despite the fact that they are unnecessary, inefficient, and economically destructive.

It comes as a great shock to left that so many of “the people” see the left for what it is: doctrinaire, unfair, and dictatorial. Why, they ask, would “the people” vote against their own interest by rejecting Democrats and electing Republicans? The answer is that a lot of “the people” are smart enough to see that the left does not represent them and does not act in their interest.


Related posts:
A Leftist’s Lament
Leftist Condescension
Altruism, One More Time
The Left and “the People”

Tricky Reasoning

Dr. James Thompson recalls the “Linda” question posed by Amos Tversky and Daniel Kahneman:

Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations. Which is more probable?
1. Linda is a bank teller.
2. Linda is a bank teller and is active in the feminist movement.

Personally, after reading the above description, I have Linda in my mind’s eye, and I can just see her lecturing me on what sort of yoghurt I should eat. If I ever met her, I would not dream of admitting that I drive a diesel car, and that I have very recently taken up sketching nude women. Of course she is a feminist, and against nuclear weapons! That is obvious. (Actually, if Linda is very attractive, it might be worth my while telling her about my book against nuclear war).

“Linda” is the tricky question Kahneman and Tversky made famous. They implied that people who chose answer 2 were being irrational, because, wait for it, it is more likely from a statistical point of view that Linda is a bank teller (answer 1) than that she is a bank teller with a particular political interest (answer 2). This is because there will be at least some bank tellers who are not feminists, and even if there is only one such bank teller, then the category “bank teller and also feminist” will be smaller than the category “bank teller”. So, it is more likely that she is just a bank teller.

However, the introductory remarks have led you into getting the sucker punch. The woman is SINGLE for God’s sake, despite being 31 years of age. Some problem there. Despite being a woman, she is OUTSPOKEN and VERY BRIGHT. She studied PHILOSOPHY which I can testify puts you on a hiding to nothing. She was DEEPLY CONCERNED with issues of DISCRIMINATION and SOCIAL JUSTICE. ANTI-NUCLEAR completes the picture. Answer 2 is the better match with the female of this species.

I’m almost certain that I got the “wrong” answer to the “Linda” question when I first came across it. Am I irrational? I doubt it very much. (Go here and scroll down to “Intelligence, Temperament, and Beliefs.”)

I understand the arithmetic of the “rational” answer, but the “rational” answer points to a nebbish, which is the image conjured by “bank teller.” The description of Linda isn’t that of a nebbish, it’s of a strongly opinionated person with a vivid character.

Therefore, answer 2 is more “probable” than answer 1. Even if Linda isn’t a bank teller, she’s almost certainly a feminist. In other words, answer 2 better describes Linda than answer 1. That’s how I saw it when I first came across the question. That’s how I see it now.

*     *     *

Related post: The Candle Problem: Balderdash Masquerading as Science

Irrational Rationality

Economists have given “rationality” a bad name. Mario Rizzo explains:

[T]he axioms of rational choice were supposed to shed light on how people actually made choices. Then a sleight of hand occurred. It was claimed that they shed light on how rational individuals would choose – without addressing the issue of whether people were in fact rational in the sense of the axioms. Finally, it was alleged – in the face of empirical evidence that people often did not choose rationally – that the axioms defined the norms of choice. They told us how rational individuals should choose. More than that. Since being rational is taken as “good,” they show us how people should behave – full stop….

The behavioralists may well be correct that people do not act in accordance with … rationality axioms. But they are surely wrong in claiming that they ought to behave in this way. The problem is not with deficient individuals. It is a problem of deficient rationality standards.

It is an old story. Pseudo-scientific economists, suffering from physics envy, strive to reduce the complexity of human behavior to simple-minded metrics, according to which they judge human rationality. When humans fail to hew to the simple-minded preferences of economistic thinkers, it is evident (to those thinkers) that humans must be nudged toward “doing the right thing.”

When economists cross the line from theorizing about economic behavior to judging it, they put themselves on the same low plain as “liberals.” The latter, at least, are honest about wanting their own way … just because … and do not resort to cheap, pseudo-scientific tricks. They simply enforce their preferences through statutes and regulations. Why “nudge” when you can coerce?

Related posts:
Why I Don’t Hang Around with Economists
The Rationality Fallacy
Greed, Cosmic Justice, and Social Welfare
Positive Rights and Cosmic Justice
Inventing “Liberalism”
Utilitarianism, “Liberalism,” and Omniscience
Utilitarianism vs. Liberty
Beware of Libertarian Paternalists
Landsburg Is Half-Right
Negative Rights, Social Norms, and the Constitution
Rights, Liberty, the Golden Rule, and the Legitimate State
The Mind of a Paternalist
Accountants of the Soul
Physics Envy
Rawls Meets Bentham
Enough of “Social Welfare”
The Case of the Purblind Economist
The Arrogance of (Some) Economists
Extreme Economism

Extreme Economism

Economism is a theory

that regards economics as the main factor in society, ignoring or reducing to simplistic economic terms other factors such as culture, nationality, etc. (definition 1.a, here)

The “etc.” encompasses family and friendship, in the eyes of the economistic economists who advise the giving of cash instead of items that the recipient is meant to enjoy. Economistic economists are the kind who mistake wealth-maximization for rational behavior.

What is irrational behavior? Whatever does not lead to the accumulation of wealth, in the view of these money-besotted economists. In that respect they are much like leftists in their condemnation of behavior of which they disapprove. Maverick Philosopher captures the mindset:

Suppose one genuinely enjoys smoking and is willing to run the risk of disease and perhaps shorten one’s life by say five or ten years in order to secure certain benefits in the present. There is nothing irrational about such a course of action. One acts rationally — in one sense of ‘rational’ — if one chooses means conducive to the ends one has in view. If your end in view is to live as long as possible, then don’t smoke. If that is not your end, if you are willing to trade some highly uncertain future years of life for some certain pleasures here and now, and if you enjoy smoking, then smoke.

The epithet ‘irrational’ is attached with more justice to the fascists of the Left, the loon-brained tobacco wackos, who, in the grip of their misplaced moral enthusiasm, demonize the acolytes of the noble weed. The church of liberalism must have its demon, and his name is tobacco. I should also point out that smoking, like keeping and bearing arms, is a liberty issue. Is liberty a value? I’d say it is. Yet another reason to oppose the liberty-bashing loons of the Left and the abomination of Obamacare with its individual mandate….

Smoking and drinking can bring you to death’s door betimes. Ask Bogie who died at 56 of the synergistic effects of weed and hooch. Life’s a gamble. A crap shoot no matter how you slice it. Hear the Hitch:

Writing is what’s important to me, and anything that helps me do that — or enhances and prolongs and deepens and sometimes intensifies argument and conversation — is worth it to me. So I was knowingly taking a risk. I wouldn’t recommend it to others.

Exactly right.

(Bill Vallicella, “Cigarettes, Rationality, and Hitchens,” December 28, 2011)

Returning to economistic economists, I note that they are also the kind who write about gift-giving at Christmas in this vein:

I am not sure why people give each other store-bought gifts instead of cash, which is never the wrong size or color. Some say that we give gifts because it shows that we took the time to shop. But we could accomplish the same thing by giving the cash value of our shopping time, showing that we took the time to earn the money. (Steven Landsburg, The Armchair Economist, .pdf version here)

Similarly:

A potentially important microeconomic aspect of gift-giving is that gifts may be mismatched with the recipients’ preferences. In the standard microeconomic framework of consumer choice, the best a gift-giver can do with, say, $10 is to duplicate the choice that the recipient would have made. While it is possible for a giver to choose a gift which the recipient ultimately values above its price — for example, if the recipient is not perfectly informed — it is more likely that the gift will leave the recipient worse off than if she had made her own consumption choice with an equal amount of cash. In short, gift-giving is a potential source of deadweight loss….

Estimates in this paper indicate that between a tenth and a third of the value of holiday gifts is destroyed by gift-giving. Because average losses of at leas 10 percent hold for all gift price ranges in the sample, the lower-bound proportional loss estimates may be reasonably applied to other populations. While the generality of these results is not settled, the deadweight losses arising from holiday gift-giving may well be large: holiday expenditures in 1992 totaled $38 billion according to one estimate.

If between a tenth and a third of this spending was wasted, then the deadweight loss of 1992 holiday gift-giving was between $4 billion and $$13 billion. (Joel Waldfogel, “The Deadweight Loss of Christmas,” The American Economic Review, Volume 83, Issue 5 [December 1993])

A current estimate of the deadweight loss of holiday gift-giving is “$46-$152 billion worth of holiday wastage, potentially equivalent to an entire year’s worth of output from Iowa,” according to Matthew Yglesias (“Do Not Buy Dad a Tie,” Slate, December 20, 2011).

The foregoing analyses and estimates hinge on a model of gift-giving that assumes away (a) the value derived by the giver of a gift — the pleasure of giving. — and (b) the value derived from the recipient over and above any value that he derives from the gift itself — namely, appreciation for the gift-giver’s thoughtfulness and effort. Moreover, the conclusion that holiday gift-giving is wasteful rests on a false premise, namely, that the devaluation of gifts by some recipients negates the added value attributed to gifts by other recipients. In other words, the condemnation of holiday gift-giving on economistic grounds manifests a belief in a social-welfare function, wherein A’s unhappiness can be weighed against B’s happiness. Once again, we see a strong resemblance between economistic economists and leftists. (In fact, I have written before about Landsburg’s misguided embrace of the social-welfare function.)

But let us take economistic economist’s view of the world and see where it leads. Imagine five persons who are mutually acquainted or related, and assume that they have taken the advice to give each other cash. Part A of the following table depicts the result of their exchanges of cash. Everyone gives everyone else some amount of money, but the amounts vary in total and detail from person to person.

Now, an economistic economist would look at the result and consider it irrational because there were 10 instances in which reciprocal gifts of cash exactly offset each other (e.g., A gave B $10 and B gave A $10). That would lead the economistic economist to suggest that the trouble and expense of giving offsetting gifts should be eliminated. The result, shown in Part B, yields the same bottom line for each person, but only 10 gifts of cash are given.

But wait, there are still unnecessary exchanges; for example, A gives C $10 and C, in effect, give $5 of that back to A. So, the next step, shown in Part C, is to reduce exchanges to their net amounts; for example A gives C $5 and C gives A nothing. This further reduces the trouble and expense of gift-giving because the number of transactions has been halved again — from 10 to 5.

A. Initial exchanges — 20 gifts:

Givers

A

B

    C

D

E

Receivers

A

10

5

10

15

B

10

5

5

15

C

10

5

15

10

D

10

15

15

5

E

10

20

15

5

Given

40

50

40

35

45

Received

40

35

40

45

50

Net

0

-15

0

10

5

*******  ************** **** ***** ********* ********* *********
B. After eliminating identical exchanges — 10 gifts:

Givers

A

B

C

D

E

Receivers

A

5

15

B

5

15

C

10

10

D

15

E

10

20

15

Given

20

35

20

5

40

Received

20

20

20

15

45

Net

0

-15

0

10

5

 ******* *************** **** ***** ********* ********* *********
C. After reducing exchanges to net amounts — 5 gifts:

Givers

A

B

C

D

E

Receivers

A

5

B

C

5

D

10

E

5

5

Given

5

15

5

0

5

Received

5

0

5

10

10

Net

0

-15

0

10

5

In the beginning, before the exchanges of cash depicted in Part A, there was an occasion that was filled with anticipation and much happiness. The “logic” of economism has reduced it to a cold, joyless exercise in computation. Bah, humbug!

Finally, I must note that — in my experience — most economists are economistic. This is from a post that I wrote more than seven years ago:

The idea of going to lunch with colleagues is to have some laughs, some good conversation (not about economics), and a few beers to help you coast through the afternoon. With economists, however, lunch always went something like this: Carping at the waiter about what’s not on the menu, followed by carping at the waiter about whether he brought the right orders to the table, followed by carefully dissecting the bill to ensure that everyone pays for precisely what he ordered, followed by computing the tip down to the last red cent instead of rounding up to the nearest dollar out of consideration for the beleaguered waiter. I’d rather have lunch with undertakers.

*   *   *

Related posts:
Why I Don’t Hang Around with Economists
The Rationality Fallacy
Greed, Cosmic Justice, and Social Welfare
Positive Rights and Cosmic Justice
Inventing “Liberalism”
Utilitarianism, “Liberalism,” and Omniscience
Utilitarianism vs. Liberty
Beware of Libertarian Paternalists
Landsburg Is Half-Right
Negative Rights, Social Norms, and the Constitution
Rights, Liberty, the Golden Rule, and the Legitimate State
The Mind of a Paternalist
Accountants of the Soul
Rawls Meets Bentham
Enough of “Social Welfare”
The Case of the Purblind Economist
The Arrogance of (Some) Economists