I’ve said it before (along with Aaron Edlin and Noah Kaplan) and I’ll say it again. Rationality and self-interest are two dimensions of behavior. An action can be:
1. Rational and self-interested
2. Irrational and self-interested
3. Rational and altruistic
4. Irrational and altruistic.
It’s easy enough to come up with examples of all of these.
Before going on, let me just quickly deal with three issues that sometimes come up:
– Yes, these are really continuous scales, not binary.
– Sure, you can tautologically define all behavior as “rational” in that everything is done for some reason. But such an all-encompassing definition is not particularly interesting as it it drains all meaning from the term.
– Similarly, if you want you can tautologically define all behavior as self-interested, in the sense that if you do something nice for others that does not benefit yourself (for example, donate a kidney to some stranger), you must be doing it because you want to, so that’s self-interested. But, as I wrote a few years ago, the challenge in all such arguments is to avoid circularity. If selfishness means maximizing utility, and if we always maximize utility (by definition, otherwise it isn’t our utility, right?), then we’re always selfish. But then that’s like, if everything in the world is the color red, would we have a word for “red” at all? I’m using self-interested in the more usual sense of giving instrumental benefits.
To put it another way, if “selfish” means utility-maximization, which by definition is always being done (possibly to the extent of being second-order rational by rationally deciding not to spend the time to exactly optimize our utility function), then everything is selfish. Then let’s define a new term, “selfish2,” to represent behavior that benefits ourselves instrumentally without concern for the happiness of others. Then my point is that rationality is not the same as selfish2.
What’s new here?
The reason that economists set up their theories this way – by making assumptions about goals and then drawing conclusions about behavior – is that they are following in the central tradition of all of economics, namely that allocations and decisions and choices are guided by self-interest. This goes all the way back to Adam Smith and it’s the organizing philosophy of all economics. Decisions and actions in such an environment are all made with an eye towards achieving some goal or some objective. For consumers this is typically utility maximization – a purely subjective assessment of well-being. For firms, the objective is typically profit maximization. This is exactly where rationality enters into economics. Rationality means that the “agents” that inhabit an economic system make choices based on their own preferences.
No no no no no. Self-interest is the end, rationality is the means. You can pursue non-self-interested goals in rational or irrational ways, and you can pursue self-interested goals in rational or irrational ways.
Sethi’s post is about the relevance of agent-based models (as indicated in the above YouTube clip) to the study of economics and finance, and is worth reading on its own terms. But it also reminds me of the general point that we should not melange rationality with self-interest. I can see the appeal of such a confusion, as it seems to be associated with a seemingly hard-headed, objective view of the world. But really it’s an oversimplification that can lead to lots of confusion.
P.S. House’s blog is subtitled, “Economics, chess and anything else on my mind.” This got me interested so I entered “chess” into the search box but all that came out was this, which isn’t about chess at all. So that was a disappointment.
P.P.S. Some commenters asked for examples so I added some in comments. I’ll repeat them here.
First, the real-life example:
Some students in my class are designing and building a program to display inferences from Stan. They are focused on others’ preferences; they want to make a program that works for others, for the various populations of users out there. And they are trying to achieve this goal in a rational way.
Second, the quick examples:
Rational and self-interested: investing one’s personal money in index funds based on a judgment that this is the savvy way to long-term financial reward.
Rational and non-self-interested: donating thousands of dollars to a charity recommended by GiveWell.
Irrational and self-interested: day trading based on tips you find on sucker-oriented websites and gradually losing your assets in commission fees.
Irrational and non-self-interested: rushing into a burning building, risking your life to save your pet goldfish that was gonna die in 2 days anyway.
You could argue about the details of any of these examples but the point is that rationality is about the means and self-interest is about the ends.