Are rational and irrational the new right and wrong?
Most people would believe that the rational thing is the
right thing, but it is also true that one person’s rational decision is another
person’s error. It might be rational to do one thing in one’s own
self-interest, but it might be rational to do another thing because it is best
for one’s family. Surely, altruistic actions can also be rational.
And, of course, who is to decide what is or is not rational,
and for whom? Doing the right thing might feel automatic, as though rational reflection has not entered the
decisions making process.
After all, there are good habits and bad habits. All of them are
often performed as though without reflection. They might promote your best
interest, but you need not be doing them because you made a rational decision. For
all we know people develop good habits because they are brought up that way,
because their parents encourage them or because they don't know any better.
Recently, behavioral economists have addressed the problem
of human decision-making. They have tried to answer this question: Are human
beings fundamentally rational animals who make decisions based on their
self-interest, or are they buffeted hither and yon, making irrational, and
presumably wrong decisions, for reasons that have nothing to do with their
self-interest?
Angela Chen summarized the research in the Wall Street
Journal:
Behavioral
economics, which has gained ground among academic economists over the past
several decades, departs from traditional notions by assuming that individuals
don't always behave rationally and act in their own best interests. Thus we
have market bubbles in which investors inflate stocks or homes way above their
rational value.
Of course, we can ask what the rational value is, and who
decides it. If the rational value involves a stock’s future earnings, we should
recognize that predicting the future is a notoriously difficult task. We may
understand the probabilities and the probabilities may point in one direction,
but what if instinct says otherwise? And what if Warren Buffet’s instinct leads
him to a different conclusion?
Market bubbles are much easier to identify retrospectively.
If there were a human being who could predict the future with perfect or even
near-perfect accuracy, he would not be teaching in a university.
People who invest at the top of market bubbles are following
what has been called the madness of crowds. But, is it rational or irrational
to participate in an activity that has netted many people vast sums of money? After
all, some people exit a bubble market before the collapse; some don’t.
And let us not imagine that scientists have a monopoly on
good investment advice. No less than Isaac Newton was ruined by investing in
the South Seas Company in the early eighteenth century.
In the past, before behavioral economics, at a time when we
left ethical issues to the non-scientists, people would have said that those
who get caught in a market bubble have been done in by their greed. They would
have committed one of the seven deadly sins, the sin of avarice.
But then, the man who was so avaricious that he kept his
money hidden in a vault, thus, who refused to chase a market bubble might also
be considered as having committed a deadly sin.
In ethics, the difference between wise investment decisions
and greed is one of degree, not of kind. The same is true of most of the deadly
sins.
To take another problem: procrastination. How do you know
when you are procrastinating and when you are working on making a judicious
decision? Some situations require quick, decisive actions. Others demand more
sober reflection. How do you know which is which?
Keep in mind, one person’s snap decision might be spot on
while another’s might be folly. The difference, of course, lies in experience.
Behavioral economists have approached these problems by
looking at the inner workings of the
human brain. They want to be able to observe what the brain does when
decision-making takes place.
Chen summarizes:
Psychologist
Dr. Kahneman, who won a Nobel Prize in economics for research into
decision-making in 2002, says it is very difficult to overcome our split-second
irrational reactions. "Much of it is automatic," he says.
"Preferences come to mind and emotions arise, and we're not aware that
we're making [decisions and assumptions] and therefore cannot control
them."
Of course, it is not at all self-evident that the mind (really, the brain) under
observation functions as it does when it is not being observed... by being hooked up to electrodes of being subjected to a PET scan?
Thinking that feels automatic is not necessarily irrational.
An experienced baseball player will know much quicker than you or I whether the
pitch that is coming at him is a fastball or a slider. He will be using
intuitive and instinctive knowledge, knowledge that he has gained from
experience. He can surely be tricked, but less often than you or I.
When it comes to moral responsibility, the inner process is
far less important than the outward behavior. You are known for what you do, not
for what you were or were not thinking before you did it. As I was arguing
yesterday, the concept of free will means that you are responsible for your
actions, regardless of your motives or of the temptations you faced.
John Horgan made the same point recently on the Scientific
American blog:
The
concept of free will underpins all our ethics and morality; it forces us to
take responsibility for ourselves rather than consigning our fate to our genes
or a divine plan.
Whatever our reservations about behavioral economics and its
forays into decision-making and ethics, it is important to note that, until
recently, the conventional wisdom, foisted on us by the therapy culture, did
not concern itself with how people go about making good decisions or with how
they make and implement plans.
Similarly, where the therapy culture, thanks to Dr. Freud,
taught people to look back into their past, the new techniques of decision
making involve projecting oneself into the future.
Therapists have been more obsessed with telling people to
figure out how they really feel than what is the right thing to do. If they
offer advice, then tend to follow mindless mantras, like: follow your
bliss.
You don’t think that those who invest in bubble markets are
not following their bliss?
Surely, it is better to manage your emotions and to think
through your decisions, even to follow
through on them, than to follow your instinct when it is leading you over the
cliff.
And yet, when you are involved in a conversation, for
example, you do not think through everything you say before you say it. A good
conversation does not feel that it is being directed by an inner genie. It
feels like it has a life of its own.
There is, as the scientists have pointed out and as I have
argued often on this blog, nothing wrong with talking about feelings. Emotion
is information in a different form.
People run into trouble when they start believing that their emotions
are key to understanding a situation. Behavioral economists are correct when they tell people to step back from their feelings, to consider them objectively as though
they were someone else’s. Then again, this does not feel like an original thought.
How do you learn how to do it? Perhaps the behavioral
economists have invented some new mental exercises, but the old way, taking advice from someone
who is wiser and more experienced, has a pretty good track record, too.