Thursday, October 26, 2006

Should Irrational Preferences Count?

The field of behavioral economics deals with predictable patterns of behavior that appear inconsistent with rationality as economists understand it. My one contribution to the field is a chapter, "Economics and Evolutionary Psychology," in the book Evolutionary Psychology and Economic Theory; a draft is available on my web page. In it I try to show that several patterns of behavior which are puzzling in terms of the assumptions of economics make sense in terms of evolutionary psychology; they can be explained as behavior that got hardwired into us because it increased an individual's reproductive success in the hunter gatherer societies where our species spent most of its history.

Consider, as one example, the endowment effect, the observation that individuals value items that belong to them more than items that do not even if, as in the classic Cornell coffee cup experiment, who owns what is the result of random chance. I explain this as a commitment strategy designed to enforce property rights in a world without police and courts, the human elaboration of the territorial behavior observed in many animal species.

The usual rule in economics is to take values as we find them expressed in behavior. In deciding whether one situation is more or less economically efficient than another we are judging whether it does a better or worse job of giving people what they are observed to want, not going behind preferences to judge whether it does a better or worse job of giving them what they ought to want.

Suppose you accept my explanation for the endowment effect, or some similar explanation for some similar, apparently irrational, pattern of behavior—that it exists not because it serves the present interest of the individual but because it served the (reproductive) interest of other individuals long ago in a very different environment. Should you still take it as a given in evaluating economic institutions?

Before answering "obviously yes," which I am tempted to do, you might want to consider a simpler question of the same sort. You observe A add some cyanide in B's wine glass, while B is looking the other direction. You ask B if he wants to drink what is in the glass. B replies that he does. Do you conclude that his drinking it is, on the principle of revealed preference, a good thing?

10 Comments:

At 4:19 AM, October 27, 2006, Anonymous Richard said...

Here's a test: what would your idealized (fully informed and rational) self want for your actual (non-ideal) self? He wouldn't want you to drink the poison, that's for sure. But given that you really are, for whatever reason, more attached to your given coffee cup, he probably wouldn't want that taken away from you, right? This provides us with a principled reason for holding that irrational preferences may count.

 
At 8:49 AM, October 27, 2006, Anonymous raphfrk said...

Could the result also be due to the way people negotiate ?

If I own a cup, I want the sale price to be high, but if I don't own the cup, I want it to be low. It is built in negotiating strategy.

 
At 12:17 PM, October 27, 2006, Blogger Fred Foldvary said...

Rationality does not apply to preferences. Economic rationality is about means, not ends.

 
At 3:06 PM, October 27, 2006, Anonymous albatross said...

I think you're changing something between your two examples. In the first case, you've got a preference which doesn't serve a purpose at present, but which may have done so in the past. In the second case, you've got an incorrect understanding of the facts--the actor thinks he's drinking wine, not poisoned wine.

To the extent that preferences serve to determine some of what makes us happy, there doesn't seem to be any use in saying "but there's no reason for you to be made happy or unhappy by that anymore." We presumably enjoy sex because that paid off in having kids, sports like tennis because that kind of skill with flying objects was important in a world where spears and arrows were high tech tools, and a variety of food because that kept our ancestors from dying of malnutrition through eating only one kind of food. I am supremely uninterested, though, in giving up sex, sports, and all food but vitamin-fortified rice cakes.

If there are cases where we can say "Your flawed reasoning will lead you to choose X, but we can tell that Y will make you more happy," maybe there's some reason to argue for encouraging Y. That's behind stuff like making your kids do homework. And probably everyone agrees that they guy who's mad enough to go curse out his boss and take the consequences is likely to be happier if he has an hour or two to cool off before talking to him.

But it seems like this kind of analysis offers all kinds of opportunities to build your own biases about what people should want into some economic argument. ("Yes, people say they want big houses, SUVs, kids, and dogs. But that's just because of evolutionary stuff of no value now. If they were being rational, they'd want condos, compact cars, no kids, and cats.")

 
At 6:33 PM, October 27, 2006, Anonymous Anonymous said...

It's not as counter-intuitive as it seems, but, yes, I would say that you want to drink the cyanide poisoned cup. Moral philosophers speak in terms of "reasons". They ask, do you have a "reason" to drink the cyanide. The debate has raged for years, largely against Bernard Williams' formulation of the problem: when do I reason to X? Where X-ing stands for some action. Anyhow, back to the cyanide.

I think you have to think in terms of negligence. Did your desire to drink the substance in front of you outweigh your desire to test the substance? Did your desire to drink outweigh your doubt in your friends? Did the cost of the precautions outweigh the cost of not taking them? I have to conclude that in each case the answer is yes.

 
At 12:28 PM, October 28, 2006, Anonymous Anonymous said...

Albatross has it right.

 
At 11:52 PM, October 29, 2006, Anonymous Steve Dekorte said...

If evolutionary emotions (as the coffee cup example) are beyond one's conscious control, and the goal is to maximize pleasure, then is it irrational to behave in ways that satisfy those emotions?

 
At 4:00 PM, October 31, 2006, Anonymous phosphorious said...

I'm not so sure albatross has it right.

The point (I take it) of the example is that there is something discoverable about the poisoned wine that would alter the decision to drink it.

But is there some thing discoverable about property rights that would alter our decision to keep the coffe cup?

Is there any non-controversial way of distinguishing between "rational" preferences and "irational" preferences.

A marxist might say that property rights are irrational, if only we knew evrything there was to know about them. Are they wrong?

 
At 11:51 AM, November 02, 2006, Anonymous michael sullivan said...

phosphorius:

you may have a point, but I see two possibilities of which I am assuming the second in david's question.

the first scenario is that if one were to explain the result of the experiment to a person holding the coffee cup, that person rethinks their position and decides they don't care about the coffee cup.

The second scenario is where even after having the experiment explained, they would say "Well, I guess it's completely irrational, but for whatever reason I still want *this* cup".

I think that either scenario could easily happen depending on the person, and that reaction #2 may well be much more likely.

OTOH, in the poison cup scenario, I suspect that *very* few people will have reaction #2 (I still want to drink from this cup) after it is explained that the cup contains poison.

Given that we haven't established the reaction of the person to the new information, I think it's clear that tthere's a difference in information here, thus the two situations are not analogous.

 
At 8:56 AM, November 15, 2006, Anonymous Anonymous said...

I think like albatross

 

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