Rational Choices

February 18, 2008

[Note: This was supposed to be part of the next post as an aside, but took on a life of its own. Since it isn’t all that important or relevant, I decided to make it its own post] 

In many of my various debates, the question arises as to whether people are truly rational. This is incredibly important in economics, because economists assume that people make rational decisions. If this isn’t the case, much of the theory behind economic choices doesn’t hold. Still, the question of whether certain behaviour is rational or not isn’t always as obvious as it looks. Apparently irrational behavior might not be irrational at all; we might just be looking at it in the wrong way.

Back when I wasn’t a fully converted economist, my economics class read the story of a homeless man who seemed unable to save anything for the future. Whenever he got some money, he would spend it immediately and be back where he started, with nothing. One interesting aspect of the story is that he did manage to enter a government program in which he received money based on certain aspects of his cost-of-living: for example, having a more expensive apartment resulted in larger transfer. Even with the program, though, within a few months he had spent all the government gave him and was unable to keep the apartment he rented. The question presented to the class was: is this person behaving rationally?

Being a good non-economist, I naturally said “No, it’s irrational to spend all your money today and have nothing left for the future. You know you want to eat in the future, you know you want to eat now, so it’s rational only to budget some of your money for current consumption and to save some for the future.”

But what I’ve just described are my own preferences: I like to save something now so that I’ll be sure I will still have something in the future. But irrationality requires a person to act inconsistently with their own preferences, not with mine. There’s the rub. I accept that people can rationally have different preferences about how much to save. I suppose that if given a choice, I’d rather receive $5 today than the same amount tomorrow. If I had to choose between being punched in the stomach today vs. next week, I’d choose to delay (ignoring the negative psychological effects of expecting to be punched). It’s not irrational to make such a choice; it’s just part of one’s constitution. We are willing to sacrifice current consumption for future benefits, but at some point you just say “Eh, I know I could get more if I wait a week, or I could get a better deal elsewhere, but I don’t want to wait, I’ll just take what I have now.”

Not everybody has the same “I’ll just take what I have now” threshold. I try to be rather sparing and maintain smooth consumption, but I’m sure there are other people who save even more than I do. There are certainly a great number of people who save less than I do. I can’t claim that they are all irrational, just because they prefer to consume in a different pattern than I do. Furthermore, I don’t see any logical principle by which to distinguish “rational” from “irrational” preferences. To get back to the story presented in my economics class, the man is acting with a set of preferences I would never adopt, but that doesn’t make him irrational.

In fact, from the behaviour as presented in the article, this man was exhibiting clear signs of rationality. He specifically looked for an expensive apartment in order to get more money from the program. Sure, renting such an apartment is “unsustainable”, but the goal isn’t necessarily sustainability. It could simply be maximizing present consumption. If that was the goal, he succeeded and therefore acted rationally.

The point is, you can’t make simple connections like “smoking leads to an increased risk of lung cancer” and say “Aha! Smoking is irrational.” We cannot reject the possibility that smokers are making the same type of tradeoff in deciding to smoke that everyone else makes in all their consumption decisions. It’s possible that, even though smokers understand the risks associated with smoking, their preferences still allow for smoking to be a rational choice for them.

Acting in a way consistent with one’s time-preferences is rational, but can it also be rational to try to change one’s time-preferences? If I do weight present consumption very highly, and act to satisfy myself now at great expense to my future selves, can it be rational to attempt to change that (or the opposite situation, for that matter, i.e. too little current consumption)? I don’t really know how to answer that. It depends on what you value, I suppose. I can conceive of a person who actually values big swings in fortune (the highs aren’t as high without the lows), and I can conceive of a person who doesn’t think consumption at any one time is all that valuable, and would rather have insurance against a downswing. There may be a way, but I just don’t know how I would distinguish the right attitude here from the wrong one.

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One Response to “Rational Choices”

  1. tripinchina Says:

    Check out this article: “Why do people smoke?” by Pierre Lemieux. http://www.pierrelemieux.org/artsmoke.html

    It seems to uphold what you were saying about rationality being defined in economic terms by whatever is in line with people’s preferences. The following paragraph is my favorite:

    “But how can consumption of addictive goods be considered rational? This puzzle was solved in the 1980s by Nobel prize-winning economist Gary Becker, who developed the theory of “rational addiction,” demonstrating that an individual may rationally decide to become addicted. Becker and Murphy [1] defined an addictive good as a good that brings “utility” (or satisfaction) as a function of previous consumption. The more you have consumed it, the more you like it. The economic notion of addiction is factual, and carries no moral overtones. A good can be addictive for certain individuals but not for others — for example: alcohol, drugs, work, eating, music, television, jogging, gambling, standard of living, religion, and tobacco.”

    Does Becker/Murphy’s definition of addiction make sense to you? For me, a more accurate understanding of addiction is the process by which a choice moves from the preferential to the psychological/physiological; i.e. after a while, your mind/body needs this substance and you would have to invest a huge amount of energy to uproot your mind/body’s chemical dependency. So, you simply continue to do it.

    I would uphold that a choice is being made each time you smoke, but that the decision is unevenly weighted towards smoking even to the point where you will defy your own preferences. Hence, irrational even according to your definition.

    In this vein, 80% of smokers want to quit but feel they cannot. (Go to http://www.joechemo.org/ for a short quiz about tobacco smoking; even though you are an educated young gentleman, I guarantee you’ll find at least a few of these facts surprising.)

    I don’t believe in forcing people not to smoke. I have lots of friends who are smokers and anti-smoking bans just mean that I have to impatiently wait around outside with them while they finish their smokes.

    People are entitled to their preferences, but they’re also entitled to full disclosure surrounding what those preferences entail in the long run. Corporations and other interested parties often seek to repress that information or provide misinformation and ideological manipulation. That’s why education and outreach surrounding issues that have been clouded in this way (like smoking, global warming, etc.) is important.

    Incidentally, I’ve also heard of the psychological theory that people will generally choose certainty over the lack of certainty. So you might consider in spite of statistics that it is uncertain that long term smoking will definitely cause you to have lung cancer. But it is certain that smoking will give you the pleasure of a cigarette. So you choose to smoke.


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