Relative vs. Absolute Rationality
I’m reading Tim Harford’s "The Logic of Life" – it’s the first book I bought on my Kindle. He uses a definition of rationality which I hadn’t seen before, which is simply that people respond to incentives. I think this model of people as relatively rational has much more support than the idea that they are absolutely rational – that they choose optimal strategies to reach their goals, that they behave in an unbiased fashion.
And I think this is a good way of squaring the ideas that there is lots of evidence for human rationality and lots of evidence for human irrationality. Before, I’d been thinking of the resolution as just that sometimes people are rational and sometimes they are irrational, depending on how complex the decisions and which heuristic modules are invoked. But it feels much more correct to say that people rarely get the answer exactly right, but that they generally respond in the right direction when things change.
This definition rescues the implications of rationality-assuming economic analysis from the "But people aren’t rational!" attack. Sure, people aren’t (absolutely) rational, but since they are (relatively) rational, policy makers[1] can influence behavior by assuming that people will respond in the correct direction to changes in incentives. And they had better be wary of creating incentives without considering the consequences on behavior.
[1] Or anyone else engaged in mechanism design for humans.
Ben,
One area in which I've done research is on the effects of incentives for increasing participation in surveys. We estimate the effects to be a few percentage points in participation. This is a classical example of an incentive: you pay people and they're more likely to do something.
Joseph and Sam,
To me that just sounds like circular reasoning. All behavior is then rational and incentive-driven, in which case the concepts of rationality and incentives have been drained of all meaning.
Umm, here's the definition of incentive from dictionary.com: "something that incites or tends to incite to action or greater effort, as a reward offered for increased productivity." I think there has to be some "something," not just a warm feeling. For example, when people talk about giving incentives to kids to get better grades, they're talking about money, or gas in their cars, or whatever, not just that warm feeling.
To get back to the original blog entry, I can't stop you from saying that rationality is "simply that people respond to incentives." To me, though, that simply removes much of what is distinctive about rational thinking, and much of what is distinctive about incentives, and makes these into empty universal concepts that describe all behavior.
In teaching economics I always bring up the problem of the Rational Actor. Any model of behavior in economics depends on the principle. As an extreme case I introduce a problem: There is a woman who abandons her very young children for a few days while she parties with friends. Most students cannot accept that her actions are rational. They confuse "reasonable" with "rational." ("Reasonable" always has a moral dimension to it -- thus it can be used in law.) But her actions are rational in that she has weighed ( implicitly ) her returns from being a responsible mother against her returns from being a party girl and found higher returns in her partying. This can, of course, be seen in terms of incentives: her basic incentive structure is to seek returns/pleasures; over the short-term ( and probably the limit of her horizons anyway) her incentive for partying is greater than her more complicated and time-bound incentive as nurturer and mother. This framework can be extended to narcotics abusers, the Manson family, etc.