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Discussing Rationality

3/3/2015

2 Comments

 
I have a confession to make: I’m having a fight. Well, not a physical one, but an intellectual one, with John Kay’s book Obliquity. It seems to me that we have some differences in our views about rationality.

Kay writes that he used to run an economic consultancy business, and they would sell models to corporations. What he realized later on was that nobody was actually using the models for making decisions, but only for rationalizing them after they were made. So far so good – I can totally believe that happening. But now for the disagreeable part:
They have encouraged economists and other social scientists to begin the process of looking at what people actually do rather than imposing on them models of how economists think people should behave. One popular book adopts the title Predictably Irrational. But this title reflects the same mistake that my colleagues and I made when we privately disparaged our clients for their stupidity. If people are predictably irrational, perhaps they are not irrational at all: perhaps the fault lies not with the world, but with our concept of rationality.
- Obliquity, preface 
Ok, so I’ve got a few things to complain about. First of all, it’s obvious we disagree about rationality. Kay thinks that if you’re predictably irrational, then maybe the label of irrationality is misplaced. I think that if you’re predictably irrational, that’s a two-edged sword. The bad thing is that predictability means you’re irrational in many instances – they are not random errors. But predictability also entails that we can look for remedies – if irrationality is not just random errors, we can search for cures. The second thing I seem to disagree about – based on this snippet – are the causes of irrationality. For Kay, it’s stupidity. For me, it’s a failure of our cognitive system.

Regarding Kay’s conception of rationality, my first response was whaaat?! Unfortunately, that’s really not a very good counterargument. So what’s the deal? In my view, rationality means maximizing your welfare or utility, looked at from a very long-term and immaterial perspective. This means that things like helping out your friend is fine, giving money to charity is fine. Even the giving of gifts is fine, because you can give value to your act of trying to guess at your friend’s preferences. After all, to me this seems to be a big part of gift-giving: when we get a gift that shows insight into our persona, we’re extremely satisfied.

Since Kay is referring explicitly to Dan Ariely’s Predictably Irrational, it might be sound to look at a few cases of (purported) irrationality that it portrays. Here’s a few examples I found in there:

  1. We overvalue free products, choosing them even though a non-free options has better value for money (chapter 3)
  2.  We cannot predict our preferences in a hot emotional state from a cold one (chapter 6)
  3.  We value our possessions higher than other people do, so try to overcharge when selling them (chapter 8)
  4. Nice ambience, brand names etc. make things taste better, but can’t recognize this as the cause (chapter 10)
  5.  We used to perform surgery on osteoarthritis of the knee – later it turned out a sham surgery had the same effect

If Kay wants to say that these cases are alright, that this is perfectly rational behavior, then I don’t really know what one could say to that. With the exception of point 3, I think all cases are obvious irrationalities. The third point is a little bit more complex, since in some cases the endowment effect might be driven by strategic behavior, ie. trying to get the maximum selling price. However, it also includes cases where we give stuff to people at random, with a payout structure that ensures they should ask for their utility-maximizing selling price. But I digress. The point being that if Kay wants to say these examples are okay, then we have a serious disagreement. I firmly believe we’d be better off without these errors and biases. Of course, what we can do about them is a totally different problem – but it seems that Kay is arguing that they are in principle alright.

The second disagreement, as noted above, is about the causes of such behaviors. Kay says the chided their clients ‘stupidity’ for not using the models of rational behavior. Well, I think that most errors arise due to us using System 1 instead of System 2. Our resources are limited, and we’re more often than not paying inadequate attention to what is going on. This makes irrationality not a problem of stupidity, but a failure of our cognitive system. Ok, so intelligence is correlated to some tasks of rational decision making, but for some tasks, there is no correlation  (Stanovich & West, 2000). It's patently clear that intelligence alone will not save you from biases. And that’s why calling irrational people stupid is –for want of a more fitting word – stupid.

Ok, so not a strong start from my perspective for the book, but I’m definitely looking forward to what Kay has to say in later chapters. There’s still a tiny droplet of hope in me that he’s just written the preface unclearly, and he’s really advocating for better decisions. But, there’s still a possibility that he’s just saying weird things. I guess we’ll find out soon enough.
2 Comments
Jussi
3/3/2015 03:18:35 am

In order to be rational one needs to know own preferences and payoffs from possible alternative choices. If one knows all these and still does not choose the best option i.e. does not maximize utility then the behavior is irrational. On the other hand, if there are too many variables to consider and too much information to process, mind becomes scarce and people may act under bounded rationality (acting rational given their information processing capacity, see texts of Herbert Simon). However, often the problem is just that people do not know their preferences and cannot predict evolution of them over time.

Reply
Tommi
10/3/2015 01:57:22 am

Jussi: Good point! I agree that Simon's bounded rationality is closer to what we often actually do. And that we often don't even know what we want - consistent preferences probably don't often exist, but are created on the spot.

As for rationality, I think there are three levels. Normative rationality is the maximization of expected utility, and thus often unavailable to us. Then there is prescriptive rationality, which is the maximal rationality with the computational resources and abilities available. Finally, there is descriptive rationality, which is just a description of what we currently do. Which (if any) of these three levels coincide is a big discussion in the field, for example between Stanovich and Gigerenzer.

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