Behavior that seems unreasonable is actually rational, or Behavior that seems reasonable is actually irrational

The counterintuitive style of economic analysis is typically set up to make one of two points:

1. Some seemingly stupid thing that people do actually is rational. (For example, see the notorious “rational addiction” model.) Of course, it’s gotta be rational, right? Otherwise why would people do it?

2. Some seemingly reasonable thing that people do actually is irrational. I came across a recent example of this sort of argument in a discussion of the sunk cost fallacy by Dan Reeves on Sharad’s blog. Of course people are irrational, right? After all, we’re bundles of flesh, not calculating machines.

Both these sorts of points are reasonable (although, I have to admit, I’m pretty skeptical both on the “rational addiction” and the “sunk cost” stories).

But what really interests me is that both sorts of arguments below are, as we say in the social sciences, “normative”; that is, they are about what we should do (in the first case, we “should” be less bothered by certain behavior that seems irrational, we should be less inclined to regulate seemingly irrational or predatory behavior, etc; in the second case, we “should” change our behaviors so as not to violate some key theoretical axiom). And both sorts of arguments make sense. But they go in the opposite direction! And I can easily imagine just about any behavior analyzed in either of these two directions. Obviously, we can analyze addiction by discussing the inconsistency of the actions of an addict; similarly, we can rationalize the sunk-cost examples by postulating more complicated goals.

As I wrote last year:

I’m still disturbed by the lack of connection that is made between the fundamental principles of economics (under which $5,000 worth of expensive wine has the same value as $5,000 worth of Cheetos) and the sort of technocratic reasoning (the kind of thing that makes me, as a statistician, happy) where you try to assign a cost to each thing.

Really this applies to economics, or “freakonomics,” in general: For example, you can do some data analysis to see if sumo wrestlers are cheating, or you can just say that sumo wrestling supplies an entertainment niche and leave it to the wrestlers to figure out how to optimally collude. Either sort of analysis is ok, but I rarely see them juxtaposed–it’s typically one or the other, and the conclusions seem to depend a lot on which mode of analysis is chosen.

P.S. I’m not trying to criticize economics, or economic analysis, in general. I do the stuff myself. (See, for example, this article of ours on cost-benefit tradeoffs in radon measurement and remediation). I’m just pointing out what I see as a difficulty with some of the normative arguments out there.

6 thoughts on “Behavior that seems unreasonable is actually rational, or Behavior that seems reasonable is actually irrational

  1. this is a great topic. It's really very relevant to statistical thinking as well. People like Kahneman tell us that the usual mode of thinking will lead us to the base rate fallacy, law of small numbers, etc. Is that (1) stupid but rational since by default we think this way or (2) irrational but common and should be corrected?

    I find the behavioral economics/psychology area useful but confusing. People are "predictably irrational", the first part says we can do little about it (those of us teaching statistical thinking know this well), the second part says we should do something about it. I'm not sure if they should be describing how we think, or telling us how we should think.

  2. the term "rationality" in economics seems (to me) to mean that faced with two equal goods, one priced higher than the other, a rational agent will chose the lower priced one. given that definition, you can probably come up with all kinds of scenarios where an individual has a perceived value that justifies rational addiction.

    i don't think it has anything to do with acting crazy, or making sense, or anything like that, it's based entirely on perceived value. if i view kelloggs corn flakes and store brand corn flakes as being "equal goods", then it would be irrational for me to choose kelloggs corn flakes, since they cost more. (some people will place some value on the brand, and so they WON'T be equal goods to those people)

    it's pretty abstract, and it doesn't model human behavior very well, since people typically don't break everything down to the bare components for valuing purposes.

    that's my interpretation of it, ymmv.

  3. I disagree that the rational addiction model is normative. I can only speak for myself, but I believe Becker and Murphy also think that rational addiction is a positive model.

    The original paper, although perhaps not the popular image, of rational addiction constructs a model of addiction using standard economic modeling devices, sees what predictions this model has, and sees if they match the real world. There is no attempt to say that people should behave in a certain way. The goal is to write down a model that explains behavior, a clearly positive goal.

    The reason a lot of economists like the rational addiction model isn't just because it says that irrational behavior is actually rational (although there is some of that). Instead, it generates several testable predictions that are, broadly speaking, correct and novel. A good example is that the rational addiction model predicts that smokers today should change their behavior in response to expected price changes in the future. Since this turns out to be true and because conventionally "irrational" models don't generate this prediction, that is decent evidence that the rational addiction framework has added to our positive understanding of the world.

  4. Interestingly, most intro econ texts begin with the difference between normative and positive statements, stressing that economics is about positive statements, though some people may use those statements to back up normative arguments.

  5. Seems like "rational" in economics is kind of like "significant" in statistics, that is, ripe for unintended punning. When an economist says "rational" it may have nothing to do with whether someone has carefully considered the options and calculated a response, just as when a statistician says "statistically significant" they don't mean that the effect size is something we should get excited about, only that it's larger than the measurement uncertainty.

    However, in statistics we've started adding the "statistically" whereas economists don't yet say something like "economically rational" perhaps they should.

  6. Rationality is always defined relative to a norm.

    For a long time, and still today, the norm is usually a law of logic, probability, or statistics.

    The laws of logic, probability, and statistics, however, were dreamed up long ago to capture what reasonable people do. (e.g. Laplace's statement that probability is "common sense reduced to a calculus", and Boole's "Laws of Thought")

    Most cries of irrationality in economics and psychology are in essence cries that logic, probability, and statistics are not modeling what people really do.

    And that's not such an important issue.

    Lets abandon the classical norms lifted from probability, logic and statistics. Let's start with the question "in a real environment, given its noise, its uncertainty, and its missing information, how might a mind arrive at a good decision?" Then let's compare people's behavior to that.

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