Monday, December 2, 2013

A comment on human rationality



     Over the last ten years behavioral economics has become quite popular, especially among members of the news media and some left wing academics. The idea that people are in general not rational has been used as a reason to implement various policies, such as the relatively harmless automatic enrollment in company 401K’s to the more intrusive elements of Obamacare and Mayor Michael Bloomberg’s soda ban. The reasoning goes that if people are in fact irrational then certain government policies can steer them towards better choices. This is where the danger to individual liberty lies.
     Behavioral economics takes society down the slippery slope of social engineering. Through experiments some economists and financial researchers claim that they have “proven” that humans are in general not rational creatures and that there is a role for the government to play in everyday decision making. If only intelligent people such as themselves, they argue, are able to pull a string here or adjust a lever there then people can be manipulated into making a better decision than they would otherwise make for themselves. This is absurd. The economic idea of rational is that humans operate under the cost benefit principle, namely that if the marginal benefits of any activity exceed the marginal costs then more of that activity should be done until the two are as close to equal as possible. This principle does not state that humans never miscalculate the costs or benefits of an activity nor does it say that all human beings everywhere will always make what is in hindsight the correct decision. Information is costly to obtain, both in effort and time as well as opportunity cost. If one makes a decision using the cost benefit principle along with the information available to them then they are being rational. If they choose to refrain from gathering more information before making a decision because they feel that the marginal cost is greater than the marginal benefit then that is also rational. Notice that I never said that a person has to make the “correct” decision to be rational. The “correct” decision is often subjective, and for someone to impose their preferences on someone else under the guise of helping that person make the “correct” decision is something that everyone who cares about individual liberty should reject. Only individuals know their true costs and benefits because only individuals know their true opportunity cost. A third party who asserts otherwise is egotistical and a danger to individual liberty and self-ownership.
      Economics as a discipline is interested in understanding and explaining why people make the choices that they do. If laboratory and natural experiments can increase our understanding then as a purely academic exercise they may have some value. But taking the results from experiments that use human beings, and are thus by their nature likely to be flawed, and then extrapolating those results to the population as a whole is dangerous. Behavioral economists looking to make a name for themselves by latching on to the misguided idea that people are not rational are doing a disservice to both economics as a discipline and society. A better goal of economists is to focus on information rather than manipulation. Cheaper, more accessible information will help consumers make better choices about everything from credit cards to health care. The Internet has allowed society to make progress along both of these dimensions and economists should be promoting policies that utilize the rationality of people instead of denying its existence. 

1 comment:

  1. "Only individuals know their true costs and benefits because only individuals know their true opportunity cost".

    Bounded rationality is one of the central themes of behavioral economics. People are simply not human calculators that can easily process vast amounts of data, forcing incorrect decisions in many situations.

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