A Few More Thoughts on Rationality

• John Vandivier

In continuation of <a href="http://www.afterecon.com/economics-and-finance/ecological-rationality-matters/">a previous article, this article lists a few more thoughts on rational actor theory.

I think there are mainly 3 comparative economic understandings of rationality and irrationality:

  • For Austrians and similar theorists, rationality is tautologically true.
    • The fact that people do not have perfect information is not taken as a component of irrationality.
    • Eg ecological rationality or constrained rationality. The idea that \"people do the best given what they've got.\"
    • So rationality becomes a bit of an implicit or superfluous discussion; irrationality is logically absurd.
  • Chicago-Style Irrationality means error or random variation in a model
    • Becker claims Chicago-style price theory holds whether individuals are rational or not. In doing so hit mathematical models make use of random noise as a representation of allegedly irrational action.
    • M. Friedman considers wrong beliefs, in any direction and for any reason, to be irrationality, and he expects this to lead to calculative error. He expects agents in possession of such qualities to be shut out of the market in the long run. D. Friedman says making a mistake can be considered irrationality.
    • On this analysis we can say \"irrationality, if it exists, is bad in the sense that it inhibits efficiency,\" but it is not special compared to other forms of error. Error, whether due to irrationality, a weak model, weak data, or any reason, is taken as a problem of inefficiency.
  • Behavioral economists take irrationality as systematic deviations (not random deviations) from some standard.
    • Caplan's rational irrationality.
    • Ariely's Predictably Irrational.
    • Behavioral economics seems to focus on people as they are as opposed to how they allegedly should be. From the perspective of some this may seem to be an extraneous proposition, but I think it's useful to distinguish it as specially ad hoc and empirical, as opposed to structural (Chicago, Keynes, etc) or normative.