The Creation of Rational Fools

Peter Kriss '07

 

Homo economicus, the notion of humans as simple maximizers of individual utility, has been around since the birth of modern economics. Though never intended to be an accurate conception of human nature, its relative plausibility in most domains of economics has made it a very useful model of behavior. However, its continued use as an assumption with little reference to its implausibility outside certain domains has lent it more credibility than Mill or Edgeworth ever intended it to wield. The systematic misapplication of the homo economicus assumption to areas where it is not appropriate may have quite negative consequences. One danger is that when taken as a prescriptive model, economics of social cooperation based upon homo economicus may skew real behavior in the antisocial direction. This is precisely the danger to which economists easily fall victim and may become like the "rational fools" to which philosopher and economist Amartya Sen refers.

 

Fundamental to nearly all of economics is the economic theory of utility. The theory assumes that each individual has a preference ordering and some utility associated with each potential choice. But this theory treats individuals as coherent preference holders who are never subject to conflicting motivations. Sen addresses two particular motivations that do not fit easily into the standard theory: sympathy and commitment. Sen's concept of sympathy includes situations where the act of helping another person gives the actor a positive feeling and cases where someone else's bad situation leads to unpleasant feelings in an observer. Thus, actions taken out of sympathy can be of positive net utility to the actor as well as the recipient because the actor takes pleasure in the pleasure of others or feels pain in the pain of others. Commitment is a subtler phenomenon. It includes actions that are taken not out of sympathy, utility maximization or avoidance of guilt, but out of a sense of right and wrong. Sen suggests that this sense can be enough to move a person to act despite an expected net decrease in utility. Defenders of the homo economicus model may claim that such pure actions do not exist (either as a philosophical assertion or because they have defined them out of existence). But even if additional motivations are present, claiming that commitment is never even a partial motivation is to say that a non-consequentialist belief is never a reason in itself for action. If, on the other hand, we accept that commitment may play a role in decision-making and want to reform utility theory, we need an alternative idea of preference orderings (how individuals rank alternatives by desirability) that can accommodate it.

 

One solution may be to introduce different sets of preferences for the same individual. John Harsanyi suggests a distinction between ethical preferences and subjective preferences. Ethical preferences are those based on impersonal social considerations while subjective preferences are purely personal. Thus, an actor can be aware of the "right" thing to do and yet be inclined to do another. This model seems to give a better account of the conflict of will we know sometimes arise in decision-making. But it is still quite unclear which of the two sets of preferences commitment would fall under. It does not fit under subjective preferences because commitment is not exactly a matter of preference at all. It is closer to ethical preferences, but ethical preferences are impersonal while actions taken out of commitment are very much inspired by a personal feeling. Thus, the distinction between these two types of preferences does solve some problems, but it does not solve all the shortcomings of the economic theory of utility and the strict utility maximizing assumption.

 

To help us better understand both commitment and ethical preferences, it may be worthwhile to consider how they relate to conceptions of justice. Brian Barry distinguishes between two notions of justice. The first, more intuitive conception of justice is based on impartiality. It follows the Kantian tradition of universalizable actions and accords well with the idea of ethical preferences. The alternative is to think of justice as mutual advantage. In this view, justice is defined by the agreements that people form while acting in their own interest. Under this belief, there is no special reason for acting justly. Unlike justice as impartiality, where the motivation to behave justly transcends utility maximization, justice as mutual advantage is simply in one's self interest to obey. Needless to say, actions based on justice as impartiality may be quite different than actions based upon justice as mutual advantage.

 

It is at least theoretically possible to design a model of decision making that accounts for the conflict of will dilemma, leaves room for commitment and sympathy and still has enough structure for consistent preference orderings. Sen presents a solution that accounts for all of these things. The basic idea is that each individual has not just one, but several different preference orderings. Preference ordering A is what standard economic theory takes to be the only one. It is the personal welfare ordering, which ranks choices based upon how much utility they are expected to bring to the actor. The idea of justice as mutual advantage is indistinguishable from this choice. Preference ordering B represents "isolated" personal interest and it only includes the utility gained directly from the choice, excluding secondary sources of utility such as sympathy. Preference ordering C represents revealed preferences. It is simply the choices that are actually taken in a given situation. Preference ordering M may be the "moral" option or the preference ordering based on justice as impartiality, commitment or ethical preferences. There may be any number of distinct preference orderings, each of which is internally consistent.

 

But which of the many options does the individual use in any given situation? Sen suggests that there is a ranking of preference orderings. This meta-ranking changes depending on the situation. Sometimes we act as the preference ordering A would prescribe and sometimes as ordering M would prescribe. The conflict of will problem that a decision maker suffers is explained as the difficulty in deciding which preference ordering is appropriate in a given situation. Standard economic theory assumes that A, the personal welfare option, is the one and only preference ordering and that if the individual is rational, it corresponds perfectly to C, the actual choices made. This simplifying assumption provides the grounding for much, if not all, of economics. But only homo economicus, the blind utility-maximizer who never questions his preferences, would be so one-dimensional in all relevant domains.

 

The homo economicus assumption teaches those who use it how to efficiently act as to satisfy preference ordering A or B. That is, economists learn to maximize individual utility, but put little thought into how those orderings were developed or how there may be other options. So what would happen to an economics student who favors the idea of justice as impartiality and would normally act in accordance with preference ordering M? He is taught that the "rational" actor (that is, homo economicus) simply maximizes utility and does not question his preferences. He is taught that rational actors take advantage of people who act "irrationally." He is taught that if such irrational actors would only act in their self-interest, they would prosper. That is, he is being taught that justice is not impartiality, but instead is the justice of mutual advantage. Thus, the economics student learns that for the rational actor, preference ordering M is simply the same as preference ordering A or B. What used to be a distinct non-quantifiable reason for action has been rendered "irrational" by the model. It is a rare student who does not eventually succumb to this pressure and internalize the belief that justice as impartiality is irrational. Thus, an intelligent student not only becomes like homo economicus, but becomes a homo economicus who shakes his head at the "irrational fools" who believe in ethical preferences or a non-utility-based notion of justice.

 

Of course, this complete transformation is an exaggeration. So let us consider some experiments that set out to answer the question of how studying economics actually affects cooperative tendencies. In one experiment that called for private contributions to public goods, first year graduate students in economics contributed, on average, only 20% of their resources while non-economists contributed 49%. But more significant than this result were the responses that the participants gave when asked what the "fair" investment in the public good would be. Of the non-economists, 25% said that "all" of one's resources would be the fair amount to contribute while the other 75% said that "half or more" would be fair. As for the economists, one third refused to answer the question or gave complex responses that could not be coded. The researchers who conducted the study, Marwell and
Ames
, note that "the meaning of 'fairness' in this context was somewhat alien for this group." Of those that did respond, most said that little or no contribution would be fair. The economists were half as likely as the others to say that they were "concerned with fairness" when making their choice. Such results do not prove the cause of this difference in behavior or reasoning, but they do provide a very strong suggestion that the non-economists tend to act more in accordance with justice as impartiality or ethical preferences while the economists act closer to how homo economicus would behave.

 

Another experiment that compared the behavior of economists to that of non-economists was conducted by Robert Frank, Thomas Gilovich and Dennis Regan. After extensive explanation and instruction, participants were to choose whether to cooperate or defect in a one-shot prisoner's dilemma. Economics students defected 60.4% of the time while non-economists defected only 38.8%. When asked their reasons for making the choice that they made, 31% of the economics students made reference only to the structure of the game itself while only 17% of non-economists did so. A further finding by the same research team found that "students generally show a pronounced tendency toward more cooperative behavior with movement toward graduation, but this trend is conspicuously absent for economics majors" (Frank, et al). Despite the suggestiveness of this finding, these studies do not prove that it is economics that leads to non-cooperative behavior as opposed to non-cooperative people tending to study economics. But regardless of the cause, it does appear that those who study economics tend to act more like the models they study than others do.

 

This is not enough to conclude that economists are rational fools. In fact, this tendency to act like homo economicus may only show that economists are rational opportunists and by no means foolish, even if non-cooperative. But in fact, several researchers have found evidence "that the ultimate victims of non-cooperative behavior may be the very people who practice it" (Frank, et al). It turns out that the long-term consequences of disregarding the welfare of others often tend to be greater than the benefit gained in the first place. But defenders of standard economic theory and homo economicus may simply say that this is a practical error, not a shortcoming of the fundamental principle of utility-maximization. This may be true, but non-economists have already found a way to avoid this costly mistake. Instead of rejecting socially responsible preferences orderings as irrational, they accept them and give them precedence when appropriate.

 

Given the importance of both cooperation and resistance to opportunism throughout the evolution of mankind, we have every reason to believe that our intuition on such matters will naturally be quite well tuned. Surely one would have to be a fool to accept the risks of disregarding such an effective and thoroughly tested decision-making mechanism in the hope of gaining some marginal advantage. There is good evidence that these rational fools, though they have a chance of greater success, are more likely than not to fall victim to their greed through the misapplication of their own model. Homo economicus is not equipped to understand his disabilities, and those that emulate him are destined to become rational fools.

 

References

 

Barry, Brian. Theories of Justice.
California
Series on Social Choice and Political

Economy.
Hemel Hempstead: Harvester Wheatsheaf, 1989.

 

Frank, Robert H., Thomas Gilovich and Dennis T. Regan. "Does Studying Economics

Inhibit Cooperation?" The Journal of Economic Perspectives, Vol. 7, No. 2., pp. 159

171.

 

Marwell, Gerald and Ruth E. Ames. "Economists Free Ride, Does Anyone Else?:

Experiments on the Provision of Public Goods, IV" Journal of Public Economics,

Vol. 15, Issue 3, pp. 295-310.

 

Sen, Amartya K., "Rational Fools: A Critique of the Behavioral Foundations of

Economic Theory" Philosophy and Public Affairs, Vol. 6, No. 4., pp. 317-344.