Rationality repost

by John Quiggin on October 14, 2005

Discussion of game theory inevitably brings up the question of whether game theory relies on an assumption of rational behavior, and, if so, whether this is a weakness or a strength. Rather than respond, I thought I’d dig up this old post from my long-abandoned (but still planned-to-be-revived-one-day) Word for Wednesday series. I’ve added a couple of links and made some minor changes.

Shorter JQ: the word ‘rational’ has no meaning that cannot better be conveyed by some alternative term. Avoid it.

The term ‘rational’ and its variants (rationality, rationalism) are used in a lot of contexts in economic debate, both positively and negatively, but nearly always sloppily or dishonestly. A specimen I’ve seen on more occasions than I can count is the line (usually presented with a sense of witty originality) ‘if you are opposed to economic rationalism, you must be in favor of economic irrationalism’.

In keeping with the idea of this regular feature, I thought about providing a definition that would clarify the issues surrounding this word and the reasons it causes so much confusion. In reflecting on the problem, however, I’ve come to the conclusion that the word ‘rational’ has no meaning that cannot better be conveyed by some alternative term and that the best advice is probably to avoid it altogether.


The basic problems surround the kind of use that is standard in economics and related discipline, in which ‘rational’ choices are those that maximise the value of some objective function. A lot of energy has been dissipated on disputes over whether this is a normatively compelling or descriptively accurate, or whether some alternative such as ‘satisficing’ would do better.

Rather than taking sides in this dispute, I will offer the following purely mathematical claim. Given any data on any observed set of problems involving the selection of one or more choices from a set of alternatives, the observed choices can be represented as the maximisation of an appropriately specified function. To give an easy example, satisficing can be represented (rationalised) as optimising, taking calculation costs into account, or alternatively as a combination of set-valued maximisation with a selection rule based on the order in which alternatives are presented.

If this claim is accepted, it’s evident that the definition of rational choices as those that maximise an objective function is empty, since all choices satisfy this criterion.

Most uses of the term rational and the opposed ‘irrational’ involve some confused mix of the following connotations


  1. reasonable as opposed to emotional


  2. calculating as opposed to intuitive


  3. self-interested as opposed to altruistic


  4. materialistic as opposed to non-materialistic


  5. logically consistent as opposed to inconsistent



Of these points, the last may require some further explanation. Various consistency properties have been proposed as requirements for rationality. The one that is most obviously reasonable, though not invariably compelling, is transitivity. If I prefer A to B, and B to C, I should prefer A to C. Others imply preferring more of a good to less (of course, the term ‘good’ is part of a circular definition). Broadly speaking, game theory requires rationality in the form of consistency, but this is often tangled up with assumptions about self-interest.

More generally, the problem with debates involving the word ‘rationality’ is that people tend to shift from one meaning to another, sometimes deliberately and sometimes without realising what they are doing. Given the entrenched nature of all five uses listed above, and the tangled relationships between them, it’s impossible to specify a ‘right’ meaning. The best option is probably to avoid the word altogether, and to use the specific terms I’ve suggested as appropriate to its various components.

{ 32 comments }

1

john m. 10.14.05 at 5:50 am

Nice post. Out of idle Friday curiosity John, which set of attributes in your list do you believe are more generally accurate when attempting to describe the actual behaviour of individuals and markets? i.e. are they reasonable, calculating etc. or emotional, intuitive and so on? Also is functional versus aesthetic a subset of 1 or worthy of its own category?

2

Brendan 10.14.05 at 6:41 am

I was going to comment on this until I realised that ‘Jim’ from the comments section of the link posted by John above, summed up what I was getting at better than I could. Here it is…..

‘The “problem” with game theory is not really rationality, but mathematical modeling. That is, what allows game theory to be consistent with so many possibilities is that it usually involves mathematical modeling without empirical discipline. Relaxing the rationality assumption would make things worse, not better; the models would be consistent with more things. Much of behavioral economics suffers from the same problem as traditional game theory in that it is consistent with many things. One has to distinguish between experiments and models. Experiments are valuable in identifying how people behave, but they are not a substitute for models, because without a model, it is difficult to identify general principles. Behavioral economics uses both tools. Hopefully, someday, experiments–or some other source of evidence–will sufficiently discipline models so that the new models themselves will be more predictive than traditional game theory, but that day has not yet come.’ (italics added).

I might add that whereas it may (or may not) be true that the Historical School were devoid of ‘theoretical insights’ this is better than theories that are devoid of empirical predictions and facts.

Quine perhaps put it best (from my point of view)

‘As an empiricist I continue to think of the conceptual scheme of science as a tool, ultimately, for predicting future experience in the light of past experience . Physical objects are conceptually imported into the situation as convenient intermediaries — not by definition in terms of experience, but simply as irreducible posits comparable, epistemologically, to the gods of Homer’. (italics added)

The various theoretical assumptions of economics, it seems to me, have no ‘better’ ontological status than the Gods of Homer (actually they have less because at least some people claim to have seen Zeus and Aphrodite, but no one has ever claimed to have seen the various postulates of economics).

BUT.

In physics these postulates actually lead us to make real world predictions that enable us to like, you know……do stuff. Trivial stuff, admittedly, like putting a man on the moon, but still.

What, precisely, do the ‘laws’ of economics (and game theory) actually predict , apart from trivialities, phenomena that could easily be explained some other way, and things that didn’t happen?

3

Jamie 10.14.05 at 7:10 am

I’m sympathetic, John, but I’m a little worried about your conclusion (that we should drop ‘rationality’ and make do with the specific and clearly defined terms instead). What if someone suggested that we just drop “morally wrong”, and instead use the different versions — “producing less utility than an alternative,” “in violation of someone’s Nozickian rights”, etc.? I certainly think there would be some expressive power lost. And maybe we lose the ability to say important things, too, if we drop “rationality” in favor of the specific versions. Because “rationality” is normative, in short.

4

Tom Slee 10.14.05 at 7:38 am

Re brendan’s post – good points, but I think that this is a widely-used but misleadingly idealized picture of how clean physics is.

There is a relatively narrow area even within physics where theory makes clear, verifiable predictions and that is the area that many focus on when picking on poor old game theory. Sure, QED can predict the Lamb shift to a gazillion decimal places, but take a look at areas like solid state physics or theoretical chemistry to name but two and you see a different picture. To give just a couple of examples:

– remember the cold fusion fiasco? there were several papers by very smart people giving theoretical explanations of how this could happen.

– Roald Hoffmann, a Nobel prize-winning theoretical chemist, gave a theoretical explanation in the late ’80s sometime for a phenomenon called “bond-length isomerism” that later turned out to be a misinterpretation of X-Ray crystallographic data.

I don’t want to pick on Roald Hoffmann here – his on-base percentage is high – but complex systems where unambiguous prediction is difficult start a long way before you get to the even more messy world of economics.

5

Brendan 10.14.05 at 7:52 am

Tom

yeah I know all about that sort of stuff. But at least physicists actually try to predict real world phenomena. With the (possible) exception of superstring theory, almost all branches of physics (as I understand it) presuppose that at some point their theories will have to at least try to predict something that will happen in the future: i.e. they will carry out experiments or carry out some form of observational study.

But my impression is that most economists don’t even do that (I could be wrong about this). It’s true that (my understanding is) this situation has improved very slightly recently, with the rise of experimental economics. But the suspicion remains that many economists create mathematical abstractions for the sake of it.

I am also slightly unconvinced that in the debate over the Historical School, the good guys won (especially when in this case they were opposed by the Austrian school).

Pretension alert: I haven’t actually read (yet) Ha-Joon Chang’s Kicking Away the Ladder. But I know that it begins with a discussion of the Historical School (which pointed me in their direction), and I was wondering if anyone who had actually read it thought that this ideas hold water. Certainly if his thesis is correct, it would seem to blow a rather large hole in neo-classical orthodoxy, and my point here is not so much ideological as methodological.

6

John Emerson 10.14.05 at 7:54 am

Just using rationality in a value-neutral, purely descriptive way would greatly reduce the harm the word does. “Rational” is normally a buzz-word — science is rational, scientists are rational, some historical actors are rational (or at least, much more so than others), and it is assumed that if everyone were more rational, the world would be a better place.

It isn’t hard to find cases when rationality is harmful, either because it’s predatory or because the assignment of costs and benefits leaves out important considerations. Rationality is a way of choosing actions, but also a way of framing justifications or proposals, and if rationality is too high on your queue of justifications, you will probably end up justifying harmful behavior in cases in which one aspect of a situation has been adequately formulated, whereas spokespersons concerned with other aspects of the situation are still speaking “pre-rationally”. External costs is an example; the human cost of economic progress is another.

It has been noted that certain sorts of sociopaths are fully rational. This is especially so if you lump traditional moral taboos in the “emotional” category, so that the taboo on torturing children is on the same formal footing as the taboo on eating shrimp.

Your post seems mostly directed at “rational” as a predictive explanatory category, as economists extend their sway outside pure market forms, for example, the ludicrous attempts to portray the family as a system of exchange where mother, father, and child are all behaving rationally in order to get what they want. This involves hypothecating imaginary “child-services” and assigning them imaginary numerical values.

An odd feature of this is that evpsych people explain that even our most irrational gut feelings are rational from the point of view of genes. This is another case of expanding the concept of rationality beyond its possible meaningful uses.

With rationality, we often emough we find ourselves in angels- dancing- on- the- head- of- a- pin territory, where all the implications of a concept are made explicit, no matter how ridiculous they might be.

Many attempts to resolve policy questions are grounded on hypothetical, schematic rational choices, often using on unquantifiable values, which are then generalized to reality. The “ticking bomb in a schoolhouse” justification for torture is one such. (Taking the rationality calculation seriously, I concluded that torture would be justified if the ticking bomb were threatening a class of innocent pre-schoolers, but not if it were merely threatening three or four annoying, defiant preteens. But obviously this was not a rational calculation at all; a bomb in a preschool was chosen by those who wanted to justify torture precisely because it had the maximum irrational emotional power.)

7

Jonathan 10.14.05 at 8:02 am

You’re confused, brendan, because there are two intertwined branches of economics, normative and positive. Positive economics is just what you say it is: making predictions and understanding how people will in fact behave. And, for the reasons you cite, there is precious little game theory in it.

But normative economics is important too. How should people behave if they have a well-defined set of goals? Are there h8uman psychoclogical aspects to thinking and choosing which, if they are pointed out to people and they understand them, they will gladly try and change? Things like using sunk costs in decisionmaking.

What game theory has contributed to normative economics is the realization that what to do is no longer simple when there are lots of people involved making independent decisions. BUt I grant that game theory has contributed almost nothing to positive economics… but then again it wasn’t trying.

So that’s where your analogy goes wrong… there is no normative physics, which is game against nature. Which is the part of game theory we’ve pretty much got licked.

8

Brendan 10.14.05 at 8:08 am

Note: I think (I think ) what I am getting at is very close to what has been stated by the so-called Post-Autistic Economics school . But I am willing to stand corrected on this matter, especially by someone who actually knows what they are talking about.

In terms of the thread of this post: ‘rationality’ like ‘irrationality’ is not some metaphysical distinction that descended from on high, but is a real world classification used by specific people in specific situations. Therefore the real issue is: can it be used consistently by people across situations? And for this to be the case there need to be public, agreed upon criteria for its application. These may of course be culturally specific (suicide bombing strikes ‘us’ as being irrational, but not presumably the bombers themselves. Ipso facto, the invasion of Iraq might well strike ‘them’ as being irrational but not ‘us’), but that in itself calls into question the universality of the use of the word.

In other words, we need public definitions: an act shall be defined as ‘rational’ if it meets criteria x, y, and z. And ‘we’ (i.e. the people using the word) have to agree on this.

This difference in viewpoints is key. As John points out, there are certain actions that may be ‘irrational’ from ‘my’ point of view, but not irrational from the point of view of the gene. And, presumably, vice versa.

Like all these categorisations, I think they are harmless as long as universalist or even metaphysical claims are not also smuggled in. Unfortunately they normally are.

9

Brendan 10.14.05 at 8:25 am

My brief looking up of ‘normative’ economics on Google describes it as being the economics of ‘values’ and that it is ‘subjective’. In other words it makes ‘policy’ prescriptions.

Now, it’s obvious that for this to work, ‘normative economics’ must be based on what human beings are like and what they want.

But the point of Kahnemann and Tversky etc. is that people do not want what game theory predicts they want. It’s not (as game theorists imply) that they are too ‘irrational’ or ‘stupid’ or ‘ill-informed’ to get what they want.

It’s much more that they don’t actually want what the games theorists predict what they want (sorry to repeat this point but it’s fundamental).

Games theory tells us what humans would want if they were not human. Hooray for games theory.

(Actually games theory predicts what we would want if people were digital computers but that’s another story).

Almost all of modern psychology demonstrates that human beings are not the ‘rational’ self-interested utility maximisers of neo-classical theory.

The theorists argue back: no, they’re not, but they ought to be. This is ‘normative’ economics. But the question: from whose point of view? The only people who ‘want’ them to be like that are the theorists. Why? Because then their actions would fit the theory (and would be easier to model). After all, if ‘everyone’ is a utility maximiser then this presumably also applies to the economic theorists too. So it’s ‘rational’ to then ask: what motivates the neo-classical theorists in their fruitless task to match reality to theory (rather than the other way round)?

To summarise: your point only works if we were all agreed about ends and disagreed merely on means. But that ain’t so.

10

Dick Mulliken 10.14.05 at 9:02 am

I got interested in the concept of rationality by way of psychiatry, where its roughly synonymous with sanity. That of course gets us nowhere, since we don’t know what sanity is. In the event, the central idea seems to be the kind of thinking that views a propostion in context. Rather like Witgenstein coming to the conclusion that propositions were uttered by human beings.
The notion of a rational economic man -a disembodied calculator of advantage and gain – has struck me as about as reliable as the labor theory of value.

11

Erik 10.14.05 at 9:06 am

I would think that the most important and non-trivial criterion fitting under 5) would be the assumption that individuals can correctly apply Bayes’ theorem, i.e. correctly process information. Most equilibrium concepts rely heavily on this assumption. If, as Tversky and Kahnemann have shown in some situations, people tend to apply Bayes’ Theorem incorrectly and do so in a systematic manner, then this surely is of consequence to game theory.

12

Cranky Observer 10.14.05 at 9:33 am

The one that is most obviously reasonable, though not invariably compelling, is transitivity. If I prefer A to B, and B to C, I should prefer A to C. Others imply preferring more of a good to less (of course, the term ‘good’ is part of a circular definition). Broadly speaking, game theory requires rationality in the form of consistency, but this is often tangled up with assumptions about self-interest.

Interesting, because in my (not-statistically-valid) empirical experienc of life most human beings have a wide variety of situations where their preferences are NOT transitive. This is very easy to demonstrate with pairwise selection of flavours of ice cream. That would seem to be a bit of a problem for these mathematical models.Cranky

13

Robin 10.14.05 at 11:17 am

The old essay by Ken Arrow “Economic Theory and the Hypothesis of Rationality” is interesting in laying out what role the rationality assumption plays in economic theory. His claim was not as much as we think. It’s been a while since I read it, but I do recall him suggesting that a sophisticated theory of habit could also fit with many economic models. Of course, behaviorally and mathematically, it would be indistinguishable.

14

abb1 10.14.05 at 11:35 am

Given any data on any observed set of problems involving the selection of one or more choices from a set of alternatives, the observed choices can be represented as the maximisation of an appropriately specified function.

Yeah, I suppose that’s true as far as it goes, but this not very helpful because for many people this ‘appropriately specified function’ is defined as ‘I won’t be bothered with maximizing any freaken functions’.

When I am buying a car I will try to maximize the function, but if I’m buying a DVD player, then I’ll just walk into the centre commercial downstairs and buy whichever one is on sale today.

I would argue that for any particular slice of the population (defined by income and demographics) there is indeed a strong pattern of choices they make – and this empirical pattern can be termed ‘rational behavior’ for this particular segment.

The more precisely and narrow this slice is defined, the more clear you’ll be able to see what the empirical ‘rational behavior’ is. If you could collect information about people who bought brand-new Chrysler minivans in 2000, you would’ve probably found out that their socio-economic situations were very similar.

15

Peter 10.14.05 at 11:48 am

Erik writes (post 11): “I would think that the most important and non-trivial criterion fitting under 5) would be the assumption that individuals can correctly apply Bayes’ theorem, i.e. correctly process information.”

Part of being able to correctly apply Bayes’ (or any other) theorem is knowing in what circumstances it makes sense to do so, and when not. As people in AI have argued at length (repeating criticisms made in the 17th, 19th and 20th centuries), probability theory is not the only, and not the only reasonable, formalism for representing uncertainty. Bayes’ theorem is not universally applicable.

As the economist George Shackle argued, blindly applying any decision-making algorithm, regardless of circumstance and context, is surely irrational. It’s the sort of thing we’d expect a machine to do, yet even the people designing the machines — we in AI — don’t think it appropriate.

16

conchis 10.14.05 at 12:10 pm

Brendan: “To summarise: your point only works if we were all agreed about ends and disagreed merely on means.”

Ah, no. It works provided what you’re interested in is means. That’s still an interesting question even if we don’t agree on ends – because sometimes we actually have to make decisions. Just because game theory isn’t a magical theory of everything, doesn’t mean it’s worthless.

17

conchis 10.14.05 at 12:21 pm

JQ,

Isn’t there something else to some claims that we’re not “rational” that you’re missing here? Namely that whatever function we might be said to be maximising (as a mathematical representation of our revealed preferences), doesn’t correspond to what we think we’re maximising (happiness, well-being, or whatever). This is the thrust of Loewenstein and Rabin’s “projection bias”, Gilbert and Wilson’s “miswanting” etc.)

Admittedly, this relies on a belief that the utils in utility functions are actually capable of corresponding to actual psychological states. But that seems far from an unreasonable assumption to most people other than trained economists.

18

Jonathan 10.14.05 at 1:25 pm

Brendan, I really don’t see it that way. Game theoretic models ask the question: if you have a particular set of strategies at your disposal in a particular situation, what ought (“normative alert”) you do? If, faced with a sufficiently similar situation in the real world, people behave differently, there are several possibilities: they don’t see the choice space as you see it, they don’t have the same objective you do, or they are taking an action which, had they but known how to behave, would have done them better by their own lights. The first two are standard problems with all models, namely, that they are only approximations to reality. In this, economics is no different than physics, except that their models cover an unchanging underlying reality which allows more precision than the messiness we poor social scientists are left to observe.

In the third objection, though, game theory actually has something to teach us. My pithy annalysis would come from an actual game (although in this case a game against nature) blackjack. A “game-theoretic” analysis of blackjack tells you how to play the game. That can be useful even if few players play that way. The goal is certainly not a predictive model of how actual players play blackjack. Such a model might be interesting, but for very different reasons.

19

Daniel 10.14.05 at 1:40 pm

Bayes’ theorem *is* universally applicable in any context where it makes sense to count probabilities at all (which is IMO fewer situations than you’d think). What is almost always wrong is to use Bayes’ theorem in combination with a flat, symmetrical loss function over errors.

20

John Quiggin 10.14.05 at 6:02 pm

” Out of idle Friday curiosity John, which set of attributes in your list do you believe are more generally accurate when attempting to describe the actual behaviour of individuals and markets?”

Speaking specifically of market behavior, I’d say mostly: emotional, intuitive, self-interested, materialistic and logically consistent.

Logical consistency arises not because people are logical but because they adopt heuristics that avoid things like intransitivity.

Another way of viewing the contrast between game theory and standard microeconomics is that standard micro usually works OK as long as people are rational on average. Game theory often requires everyone to be perfectly rational.

21

roger 10.14.05 at 11:16 pm

To me — and this is perhaps eccentric and nutty — the problem is in accepting, naively, the idea that there is an individual out there, about whom we can say, such and such is acting rationally, making choices, etc. Not that there isn’t an individual, but until we know the role of the individual, we won’t understand the game in which he or she has standing. This week’s Refco collapse is a good example. The story is that the chief executive at the firm decides that he is going to make up an outstanding debt to the company of 450 million dollars. He pays it back, and chaos ensues. The company is in a death spiral, he gets arrested, and all because the act is perceived through a grid of roles in which it doesn’t make sense that he should be in the position where he feels he has to cough up 450 million dollars.

What is rational, here, is relative to the role that Bennett is playing. On the one hand, he is a debtor to the company, on the other hand, he is the chief executive officer of the company. In the latter position he guides the company into being acquired, in the former position he takes an ugly debt off the company’s books.

Now, it seems to me that game theory equates the individual with the role of one player at one game asserting a strategy that leads to an optimal advantage. But in reality, every game determines roles for the players, and sometimes superimposes different roles. Which is why starting off with a simple model that segregates and boxes information — as in the prisoner’s dilemma — doesn’t model the way a role is usually played. And that means that the deviations from the models of game theory are hard to model within the theory, even retrospectively.

22

Chris S 10.14.05 at 11:28 pm

I’d say, think twice about using Bayes’ theorem in any case where you don’t have a well defined chance set up . You don’t always have objectively based priors, and when you don’t some of us are rather skeptical of using Bayes’ theorem.

23

radek 10.15.05 at 3:41 am

“Game Theory always brings up rationality”

Yes, but it’s always brought up by people who don’t know what they’re talking about. Take evolutionary game theory. There’s no rational behavior there, simply because there’s no choice (unless someone wants to argue that a Hawk and a Dove are rational). Some people just do one thing (for whatever reason), some do another (for whatever reason), some strategies survive and some don’t. There’s still the concept of equilibrium, albeit different than standard.
Non-cooperative game theory in a way is more of an analysis of available strategies than behavior, or decision making. Of course, since economics, whatever else it may do or be, does study “choice” in most applications the “how” of decision making is as important as the “what”.

Rationality and game theory are NOT necessarily linked by some vital umbilical cord. One is an assumption, which can be relaxed or even dropped, the other simply a tool, a method. It’s like saying that if you own a car, then you can only drive it to Wichita, Kansas and nowhere else. You can drive it lots of places if you’ve got directions and you can use Game Theory in a lot of ways that don’t imply ‘rationality’.
If you want to get down on rationality in economics then get down on rationality in economics. Game Theory is just an innocent bystander in that brawl.

24

radek 10.15.05 at 4:32 am

Mathematical Claim, then “If this claim is accepted, it’s evident that the definition of rational choices as those that maximise an objective function is empty, since all choices satisfy this criterion.”

Well. No.

1. Even if the definition given above is circular – in the sense that all behavior is rational by definition – it is not necessarily empty. As social scientists we still might want to know what exactly the function being maximized consists of. If I see you doing something, which in layman’s terms could be called ‘irrational’, I still might want to understand the reason behind the madness. I wouldn’t call you irrational or nothin’ but, I would still be interested in the peculiar kind of a utility function, the preferences, the motives, that generate a particular type of behavior.

2. Maximization itself implies an existence of a structure. Generally speaking, well ordered preferences (transitive and complete) over a given choice set. Hence to maximize something, one has to assume consistency and comparability of alternatives in the first place – the (5) above. So the standard definition of rational preferences in economics is actually quite parsimonious, at least relative to how other disciplines define rationality. In absolute terms it is not, because:

3. The “rational” in economics refers not to people but to their preferences. Preferences are rational, people … well, who knows. Which is not a trivial distinction. I might have transitive and complete preferences but that does not automatically imply I “act” on them. I think Conchis above is making the same point. And,
4. Your Mathematical Claim smacks of the whole ‘Revealed Preference Approach’, without the revealing part. Not that there’s anything wrong with that. What’s wrong with that is to equivocate transitivity with consistency within that approach or in the context of the above definition. Consistency can only be determined if you have more than one observation since it necessarily involves comparing stuff. If you want to judge only a single observed choice, welp, then it’s gonna be consistent by definition since all you can go by is that choice itself. So in a way, there’s an intertemporal aspect here – if you see me doing one thing and then another how can you know whether I’m an irrational type of guy or whether my preferences have changed in the meantime, while still being complete and transitive. That’s the basic shortcoming of both the axiomatic approach to “rationality” and the mathematical claim above. Both are static. That’s what motivated Samuelson, though it became pretty obvious that even if you paribus all the ceteris you still can’t squeeze much out if it.

I guess these last two points agree with the spirit of the post, although for completely different reasons. And what Game Theory has to do with any of it beats the hell outta me.

25

John Quiggin 10.15.05 at 7:49 am

Radek, there’s a big difference between saying “there are applications of game theory that don’t rely on strong rationality assumptions” and “what Game Theory has to do with any of it beats the hell outta me”.

Look at notions like subgame perfectness, iterated dominance and so on. These are important in game theory and rely on much more stringent rationality criteria (including common knowledge of rationality) than most microeconomics or macroeconomics (extreme forms of rational expectations macro are an exception, but no one much believes them any more).

26

Ben P 10.15.05 at 3:57 pm

Quick question: is there any difference between “game theory” and “rational choice theory,” or are they just different names for the same ideas? Or, rather, are they theories that overlap in important ways, but cannot accurately be called the same thing?

27

John Quiggin 10.15.05 at 5:29 pm

Game theory is reasonably well-defined and, with the exception of evolutionary game theory, discussed above can be regarded as a subset of rational choice theory, focusing on strategic interactions between actors and concerned with equilibrium outcomes (such as the famous Nash equilibrium).

Rational choice theory is a bit vaguer – some would use this term as a synonym for neoclassical economics, but most commonly it’s used in connection with applications of neoclassical economics to politics.

28

radek 10.15.05 at 7:48 pm

“Game theory is reasonably well-defined and…can be regarded as a subset of rational choice theory”

This is the essence of my disagreement. GT is a tool, a method. It is not a theory in the same sense that RTC is a theory – a theory of human behavior. GT is a theory in a mathematical sense in the same way as say, Functional Analysis is a theory. So to the fact that ‘rationality’ gets used in confusing and ambigous ways, you gotta add the confusing and ambigous ways in which the word ‘theory’ gets used. This is why I’m objecting to conflating the two. You wanna argue about the validity/usefulness of the assumption of rationality in economics (or Social Science in general) that’s one thing. You wanna argue about the validity/usefulness of game theoretic methods in economics (and beyond) that’s another. There’s hardly any value added to the discussion by slapping these two topics together.

I don’t think there’s anything intrinsic about game theory that implies rationality. Note that your discussion about rationality above has nothing to do with game theory per se, it’s just sort of appended ad hoc to a sentence that mentions GT. Usually the strong rationality (I’d rather call it ‘sophistication’, as in the case with SPNE) that you’re objecting to is added in, but that’s because of the standard problem that … well, when you get rid of rationality you don’t have much to replace it with. This is true of most economic models, whatever the tools you’re using.

Another counter example. Games which have both ‘rational’ and ‘crazy’ or ‘random acting’ agents. The rationality assumption lies in the equilibrium concept used (or not), not in the game itself.

Also, the basic problem in modeling human behavior is that you want your model to generate non-trivial sharp predictions which have a hope of being tested against real life data (contrary to what some posters assert above). That’s not easy. Rationality by itself in fact doesn’t usually deliver, partly because in economics at least it’s a much weaker concept then most people think. So how do you get these non-trivial sharp predictions? You gotta throw in something else. In non-game-theoretic models the assumption of price taking behavior (which in fact in many cases is not strictly speaking “rational”) usually gets you there. In game theoretic models you need some kind of sophistication on the part of the agents – have them think about how the other player is going to act, whether certain strategies are credible or not etc. Or you assume that players who play strategies which result in lower payoffs get eliminated over time – evolutionary approach. Either way, you got to have something there to make it work which goes beyond rationality.

The length of my posts, I think, reflects the fact that I’m a wordy kind of guy, but also that there’s too many issues here being discussed at once, btw.

29

Robert Waldmann 10.15.05 at 7:53 pm

Very nice post. I link to it and (this time) spell your name right. I absolutely agree that defs 1 through 5 are all used and that people shift from one to the other. I agree this means the word should be banished. I have more comments on 1-5

1 reasonable as opposed to emotional

2 calculating as opposed to intuitive

1 and 2 are definitely not how economists use the word. The standard view is that the mental process is not our business and “rational” is a statement about behavior. This is the standard view because it is obvious that no one calculates as an agent in economic theory does when deciding what to order in a restaurant.

3 self-interested as opposed to altruistic

Economists often identify rational with self interested but the official line is clear. Ratiopnal means maximizing some objective which can include the welfare of others as arguments so rational altruism is definitely allowed by economic theory.

4 materialistic as opposed to non-materialistic

Clearly not what economists mean. Many are religious and don’t consider that irrational.

5 logically consistent as opposed to inconsistent

This is really a red herring. The reason is that it is really a clearly false statement that utility functions are time separable and not a statement of rationality at all. If given a chance for Pizza or conversation I choose Pizza then given a choice between reading a book and conversation I choose conversation then given a chance between reading another book and shoving another Pizza down my throat I read a book this just shows I had a very empty stomach and now have a full one. It does not mean I am irrational.

All of the alleged implications of rationality such as trasitivity revealed pref etc are really absurd claims about time separability. If they were what economists really mean by rationality then all economists would have long since admitted that no one is rational. Instead they are silly arguments which have nothing to do with anything and are accepted only by theorists who have lost track of the concept of consumption.

Got to admit that Amartya Sen said this long ago but it was clear to me before I heard it from him.

The whole idea of rationality as consistency requires that one may face the same choice twice. This is impossible if the choice made in the past has an effect on the objective in the present. All know that past choices do have such effects. Thus rationality means transitivity when there is no really good reason to think that non separabilities are important, that is to say, nothing.

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paul 10.16.05 at 10:09 am

Reading all of these comments just seems to make JQ’s point over and over again. The very investment some commenters have in the word and their legitimacy in using it in the way(s) they feel useful seems to me to confirm his observation that it is simultaneously empty and dangerous.

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Brian Macker 10.16.05 at 1:16 pm

I came to this article via Catallarchy. I wrote a post about that article and have a section at the bottom of my article on the use of the term rational in economics. There are no trackbacks here, so click on my name to get to the article or copy this link: http://brainwacker.blogspot.com/2005/10/attempted-assasination-of-word.html

I think it was a mistake for economists to give the word rational a different meaning than the conventional one when discussing human behavior. The common meaning of the word rational is already in the sphere of human behavior which economists are trying to address. They should have coined a new term.

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Paul Gowder 10.16.05 at 3:11 pm

Yea, well, the trick is to specify the function appropriately.

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