Anyone listening to the intellectually oriented radio and podcast world over the last several years will recognize this theme: recent scientific research has identified types of decisions in which human beings tend to make somewhat counter-intuitive decisions. From memory:
1) People faced with a promotional display of 24 different varieties of jam will not buy as much jam as people presented with the same promotional display of a mere 6 flavors.
2) Hotel customers will be more likely to respond to a card noting that 75% percent of other customers choose to save water by not requiring the hotel to wash their towels every night than will respond to a card making the intellectual case against profligate water consumption.
3) People will choose to save more if their employment contracts default to contributing to a 401k program rather than waiting for the employee to take the positive step of enrolling in the program.
4) An Israeli day care center’s institution of a sliding “lateness penalty” in an attempt to reduce tardiness among parents picking up their kids backfires as parents interpret the charge as giving them license to be late, when previously they had considered arriving late as an act of rudeness towards the center.
As an Economics grad student in the mid 1980’s I was introduced to Daniel Kahneman through his research that found that even math experts (not to mention everyone else) were very bad at incorporating general information about we know about the world when dealing with specific types of questions. E.g. (and I’m making the details up entirely), when presented with a description of a person that includes the characteristics “bookish” and “likes poetry,” survey respondents will probably be more likely to choose “philosophy professor” over “computer programmer” when asked to speculate about his profession, even though there are many many many more computer programmers in the world than philosophy professors. In fact, there are almost assuredly more bookish computer programmers who like poetry than similar philosophy professors simply because there are so many more computer programmers in general.
Frequently this research is presented as a frontal assault on the assumption of rationality employed by standard economic analysis, especially of the “Econ 101” variety. And it is, to some extent. But just to some extent.
Kahneman is disappointingly full of himself when lambasting expected utility theory, a mainstay of economic theory which Kahneman appears to think is entirely overthrown by his research. The work on which he bases this assessment investigates the difficulties humans have dealing with very small probabilities, difficulties which have some unusual effects at the margin (such as most people “irrationally” overweighting a .0001% chance of something happening), and making inconsistent decisions depending on the framing of options (e.g., starting with $300 with the ability to possibly make an additional $200 vs starting with $500 with the ability to possibly avoid the loss of $200).
This is valuable research, and well worthy of the Nobel Prize bestowed upon him. But how many real world decisions fall into these categories? How does this research weigh on the Econ 101 discussion of, say, the effect of a carbon tax on oil at the wellhead on the price and consumption of gasoline? The effect of the minimum wage on the unemployment rate of unskilled teenage labor? The effect of rent control on the housing market? Not a lot. Some, perhaps. But not a lot.
Attacking the “rationality assumption” in economics has become something of a shibboleth among the less educated critics of Economics. But, in fact, the sort of super-human feats of hyper-rationality that are mocked by these critics really aren’t necessary for what economists want out of the “rationality assumption.” When you find yourself in a supermarket (never mind how you got there), and you’re hungry, do you usually find yourself walking out with a roll of toilet paper, a bar of soap, and two quarts of oil, or are you more likely to toss a pound of ground beef and some buns in your car for the trip home? For the basic, regular lessons, that’s really all that Economics needs from the rationality assumption.