Friday, January 8, 2010

In Defense of Rational Decision-Making

Considering how long the Enlightenment has been around, we should not still be debating whether or not human beings can be trusted to behave rationally. Yet, we are.

If you believe that we humans are fundamentally greedy, and that we are motivated by our wish to accumulate as much as we can regardless of the consequences, then you would side with those who believe that our irrational or visceral motives will always outweigh our rational faculties. For some of my earlier comments, see here.

When markets crash, those who believe in the power of irrational impulses feel vindicated. According to their theories, the crash was an inevitable manifestation of a natural human propensity, one which, left unchecked and unregulated, must inevitably lead to disaster.

In the long run, these theories would have it, we simply cannot be trusted even to do what is best for ourselves. And why, if that is true, should be trusted to do what is right for others?

Richard McKenzie offers an interesting rejoinder in his article, "Predictably Irrational or Predictably Rational." Link here.

In his words: "Indeed, behavioralists have discovered so many decision-making biases and flaws, resulting in so many documented 'irrationalities' among their varied human subjects that one has to wonder why they believe themselves capable of writing rationally on the subject of peoples' irrationalities."

This comment makes an interesting point. Just as psychoanalysts insist that they are prey to the same impulses that torment the rest of humanity they also believe that, by dint of their superior insight, they are better able to control the impulses and thus are qualified to judge everyone else who lacks the same wisdom.

Anyway, ideas have consequences. And if we cannot be trusted, then we need be be regulated, even nudged and pushed in the right direction. Left to our own devices, we will become greedy and rapacious; thus we need a higher authority or a more powerful institution to set us on the right path.

So, it makes sense that behavioral economists who believe in the power of irrational and visceral motives would also believe that markets need to be regulated and controlled by government. As George Akerloff wrote: "We assert the necessity of an active government role in economic policymaking.... we know that managing ... animal spirits requires the steady hand of government." Link here. Via Simoleon Sense.

While there is always a role for government as referee, it is quite something else to call for the steady hand of government. And isn't this notion of an active government hand in all economic transactions strangely familiar: doesn't it echo the notion that given our propensity to sin we cannot be trusted to conduct our personal lives without the steady and very visible hand of a church?

If you follow McKenzie and ask how those who regulate the markets can be trusted to control their own visceral impulses, the answer must lie in the fact that they are wiser and more clear-headed because they are not burdened with the profit motive. Thus, they will be less prey to greed. The same would apply to tenured academic economists.

Similar reasoning defines Freudian psychoanalysis. For Freud, the power of instinctual and self-destructive tendencies, coupled with the influence of trauma and inadequate parenting, made it impossible for those who had not undergone psychoanalysis to make good choices in life. Absent a journey on the couch, they would be condemned to repeat the miseries of the past.

Thus, Freudian treatment could not begin with the concept that people can be trusted to make good and right decisions. At its inception it prohibited people from making life decisions while in treatment.

Obviously, psychoanalysis does not call for expanded government control of the economy. At the least it calls for a transformation of the culture to make it more tolerant of those who are prey to their visceral impulses and animal spirits.

Clinically, psychoanalysis wants the patient to get in touch with his visceral or instinctual wishes, the better to be aware of their influence and the better to rein them in.

None of this has ever taught anyone how best to make decisions. You cannot learn how to make decisions unless you make decisions. If you learn that what matters in your decision-making is whether or not your decisions repeat or enact an irrational impulse, you will cut yourself off from any reality that might tell you whether your decision was right or wrong.

In some economic theories this reality is the market. If the market passes judgment on your decisions, McKenzie believes that it encourages rationality and better reflects the truth of human character than do laboratory experiments.

In his words: "Indeed, markets do far more than induce improved allocation of resources, given wants and resources. Markets induce market participants to be more rational than they otherwise would be because they must pay a price for being irrational."

If you want to believe that people are viscerally inclined to do the wrong thing, then you either become a proponent of increased regulation or a control freak. You might easily decide that other people in your life cannot be trusted to do the right thing, thus, that you need to keep them on a very short leash indeed.

In my coaching practice it often happens that clients insist that their friends, neighbors, children, and significant others are incapable to doing the right thing. From there they rationalize all manner of criticism and coercion.

This assumes that said individuals are not to be trusted,and at times, are not even allowed to fail.

Worse yet, people who cannot be trusted are also not being respected.

But what happens when you are one of those who is not respected as a rational and responsible human being, but who is demeaned for being prey to your animal spirits and visceral impulses?

Under those circumstances you would probably feel disconnected and detached from human community, alienated from your moral being. However your inner moral sense might be telling you otherwise, you would feel forced to go out and get what you want when and how you can.

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