Canis Œconomicus

Is it rational for economists to assume rationality?

Corgi images as if rendered by Max Ernst, Maxfield Parrish, Henri Matisse, John Tenniel, Jean-Auguste-Dominique Ingres, Fernando Botero, Aubrey Beardsley, Pierre-Auguste Renoir, Pablo Picasso, and a medieval tapestry weaver. Produced via artificial intelligence at Craiyon.com.

NOTE: I’m posting excerpts from my in-progress book manuscript, Fifty-Million-Dollar Baby: Economics, Ethics, and Health. The goal is to edit the manuscript in plain view, based on readers’ comments, corrections, suggestions, and criticisms.

One of the more satisfying aspects of economics training is that it demands a respect for the intelligence of ordinary people. The assumption that people tend to act rationally forms the foundation of neoclassical economics. Properly applied, this structure provides a restraint on the impulse toward paternalism and authoritarianism that often rears its head among politicians, doctors, and—when they forget or ignore this aspect of their training—economists. Here, we’ll examine the concept of rationality as it relates to politicians, doctors, marketers, corgis, baseball players, infants, autistic savants, primates, mafiosi, economics professors, and Chinese emperors.

The assumption that people are rational—a construct known as Homo Œconomicus—was introduced into political economy in the early 19th century by John Stuart Mill. For the most part, economists do not really believe that humans are rational in a literal sense. (We all have friends and family to remind us otherwise.) Rather, the idea goes, pretending that humans are rational gives you rather good predictions of human behavior. In his seminal “The Methodology of Positive Economics,” Milton Friedman said that economists treat humans “as if” they were rational. He argued that assuming (pretending) falsely that sunflowers are sentient and rational will, nevertheless, give you rather good predictions about where the flowers will turn their faces as the day progresses. (Some evolutionary biologists assert that, in crafting this exposition, Friedman really didn’t understand evolutionary processes. Since I assume you’re rational, you’re free to decide who was correct—and I suspect Friedman would concur.)

In The Fatal Conceit: The Errors of Socialism, Nobel economist Friedrich von Hayek suggested that ordinary individuals are capable of greater rationality than are planners, deigning to make decisions on behalf of the rest of us:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account.

Marketers versus Economists

A student once told me that economics is preferable to marketing because marketing assumes people are stupid and economics assumes people are smart. As an economist, this sentiment warmed my heart, but did not prove that the marketers are wrong.

Why charge $2.99 for food, rather than $3.00? It seems inefficient (irrational?) for all concerned. Making change slows the lines a bit for both customers and cashiers. A marketer might tell us that it is because customers barely perceive the digits to the right of the decimal point, thus persuading them that this food is a bargain. An uncharitable interpretation would be that marketers think people are irrational fools whose vision and good sense stop at the decimal point.

An economist, in contrast, asks why a rational merchant would charge customers $2.99, knowing his clerks could run more smoothly by charging an even $3.00—and why rational consumers would purchase from a merchant who wastes his valuable time by making change. Economists have suggested that making change forces the cashier to open the cash drawer to obtain the change for the customer. This records the transaction and makes it difficult for a dishonest cashier to pocket some of the day’s proceeds. And in fact, it appears that 99¢ pricing first appeared just after the cash register was invented. Further supporting this hypothesis, I have never seen a vending machine that spit 1¢ back, thus making the prices $0.99, $1.99, etc. The logic is that 99¢ pricing keeps clerks honest, whereas machines are intrinsically honest. So, economics appears to come up with a good answer. Keep in mind that “a good answer” is not necessarily “the right answer.” 

Still, companies pay good money to marketers, and I assume the companies are not irrational. Plus, this anti-theft argument would seem to fail once we introduce sales taxes to the mix. And it certainly doesn’t answer the question of why a car dealer charges $24,999 rather than $25,000.

Mathematician’s Best Friend

Before tackling the question, “Do humans act as if they are smart?” we can begin with the simpler question, “Do dogs act as if they are smart?” Many years ago, I paid a considerable sum to have an entire corn cob removed from my corgi’s gut, so there’s a natural impulse to say “no.” When not swallowing large foreign objects, however, the intellectual capabilities of dogs are impressive. Mathematician Timothy Pennings observed how his corgi, Elvis, retrieved a ball thrown from a point on the beach (A) to a point in the lake (B). The dog wished to get to the ball as quickly as he could. Pennings realized that the dog was acting as if he were doing complex calculus in planning his route. (The diagram below is adapted from Pennings’ article.)

A straight line from A to B is the shortest route but is likely the slowest because it entails swimming the entire way. Alternatively, the dog could run rapidly along the beach from A to C, turn left, and then swim from C to B; this path would maximize fast running and minimize slow swimming. In fact, though, the dog tends to run from A to D, angle out into the water, and swim directly from D to B. This means a bit less running and a bit more swimming, but also a bit less distance. Knowing the dimensions of the triangle and the dog’s running and swimming speeds, a mathematician can calculate where D lies (i.e., where the dog should veer into the water to swim). In fact, that is about where the dog turns. The dog acts as if it has instantaneously performed the calculus problem.

The corgis’ gray wolf ancestors’ survival relied on speed and cunning in reaching quarry. I have owned four corgis, and rest assured, they cannot perform calculus. But they are adept at acting as if they can.

Speed is not everything. In racing to catch an object in flight, a dog also values accuracy. There is no sense getting to a spot rapidly if, in fact, it turns out to be the wrong spot. If the ball follows trajectory (a), then the shortest path for the dog to reach the ball in time to catch it is (b). In reality, however, dogs will take a longer route (c). At first glance, this appears inefficient – irrational, if you will – because it expends more energy and takes a longer time, perhaps delaying the dog’s arrival long enough to miss the catch. But the dog’s on-board computer is not malfunctioning. Following the arc (c) allows the dog to calculate the speed and trajectory more accurately. This strategy costs the dog time and energy, but it is likelier that he will arrive at the correct spot. Again, the dog acts as if it is performing calculus, but this time the math is far more complex and data-intensive. In essence, the dog is performing the sort of calculations imbedded into an anti-aircraft missile. All without the benefit of so much as an introductory course in calculus.

Play Ball!

As a professor, I’ve regularly asked college baseball players the following: “If you are an outfielder standing at Point X and a batter hits a potential pop-fly that will fall to earth at Point Y, what will be your route from X to Y? Almost invariably, the player will answer, “A straight line.” In fact, the player will twist his neck in the same manner as the corgi described above, and he will follow essentially the same curved path that the dog follows—for the same reason. The roundabout route expends more energy and delays his arrival at Point Y – perhaps enough to miss the catch. But the curve increases the likelihood that he will arrive at the correct spot – the place where the ball actually falls to earth. (Similar logic applies to runners, as well.)

Like the corgi, the baseball player appears to perform cruise-missile mathematics in real-time. He is not doing the math, but acts as if he is. And he is utterly unaware that he is doing anything other than a straight-line dash toward the ball. As humans, we need not be aware of a problem in order to seek a solution. And we need not be familiar with the tools in order to use them.

This idea even appears to operate in early infancy, as demonstrated by “the mobile paradigm.” Beginning in the late 1960s, researchers placed infants in two sets of cribs. Each child had a string leading from his foot toward a mobile suspended above. For some infants (Group A), their strings tugged on the mobile, causing it to shake and rattle, to the delight of the infants. For the other infants (Group B), the strings were not actually attached to the mobiles; rather, their mobiles were set to shake and rattle at random. The infants in Group A remained fascinated and continued manipulating their strings for long periods. Those in Group B quickly realized that their movements bore no relationship to the shaking and rattling; they quickly grew bored and fell asleep. Even a few weeks out of the womb, the infants were capable of conducting sophisticated statistical analyses.

We can pretend, then, that the minds of corgis and athletes and newborns perform high-level mathematical calculations in an instant. But surely that is only metaphor – a useful fiction. The brain, after all, is not a computer. Correct?

Fact or Fiction?

The late neurologist Oliver Sacks reported on a pair of autistic savant twins. In most realms, they were low-functioning. They had, for example, a meager comprehension of addition and subtraction. They understood that 1+1=2 and 1+2=3. Their capabilities faded at around 2+2=4, and they seemed to have no concept of multiplication or division. They did have two remarkable capabilities, however.

Their first skill was, given a date within a span of thousands of years, they could almost instantly say what day it fell on. “July 4, 3776?” (Eyes move, as if through a 3-dimensional matrix.) “Thursday.” For the uninitiated (or even the initiated), calendrical math is extraordinarily complex. In general, the day/date relationship follows a 28-year cycle (7 days in a week x 4 years between leap years). In the US, Inauguration Day, January 20, 2013 fell on a Sunday, so the festivities were moved to Monday, January 21. The same occurred in 1985 and in 1957 and will happen again in 2041, 2069, and 2097. The pattern shatters afterward, however, because in 2100 the leap year fails to appear. The Gregorian calendar skips one leap year in 3 out of every 4 centuries. (There was a February 29, 2000 and there will be a February 29, 2400. But there was no February 29 in 1900 or 1800, and there will not be in 2100, 2200, or 2300.) Despite this, the twins had no trouble firing off the days.

The twins’ second skill was an ability to pluck prime numbers of many digits out of thin air. This is a skill that is problematic for even skilled mathematicians with advanced computers. And prime numbers are meaningless outside of multiplication and division, which the twins seemed not to comprehend in the slightest.

“Wetware,” a term originating in cyberpunk novels of the 1980s, treats the brain as a literal computer. In recent years, scientists have begun to create computers made out of biological materials.

Is Altruism Rational?

Altruism seems to fly in the face of the Rational Man construct. In the stereotypical formulation, an individual seeks to maximize his or her own utility (happiness) and not that of others. One way economists have sought to explain kind acts is to assume that my utility is in part based on your utility. Robin Hanson describes an alternative explanation in which altruism is really the pursuit of self-interest in disguise. Primatologists have observed macaque monkeys, living in the wild, with debilitating deformities, such as withered limbs. Sometimes, these monkeys mate and live to old age, though they are incapable of securing adequate food or defending themselves from predators.

Macaque monkeys live in bands, and, according to Hanson, the disabled survive because the chief of the band shares his own food with them and protects them from predators. Why would the leader expend precious food and risk his life for the benefit of one who cannot help him? Simple kindness? Perhaps not. An alternative explanation is this: By giving food and protection to the weakest in society, the leader is sending the following message to the rest of the band: “I am so rich that I can give away food. I am so strong that I can fend off dangers that threaten even the weakest among you. If you are ever threatened or wounded, you had better hope that I am present and in good condition, for you may need me. Therefore, if you ever see me in danger, it would strongly behoove you to come to my aid. Because if anything happens to me, there will be no one else to protect you.”

Altruism, then, may be a circuitous form of self-interest. Hanson also notes that mature Neanderthal skeletons have been found with debilitating deformities, suggesting similar behavior to the macaque bands.

Upon hearing of this analysis, my wife, Alanna, instantly thought of Don Corleone in The Godfather (1972). The daughter of Amerigo Bonasera, an undertaker, has been brutally beaten by two men, and Bonasera wants them killed. Don Corleone agrees to fulfill the request. When Bonasera asks how he can pay for this deed, Don Corleone tells him,

Some day—and that day may never come—I will call upon you to do a service for me. But until that day, consider this justice a gift on my daughter's wedding day.”  

A student told me that his economics professor said that it is always better to give cash as a gift rather than a specific item. With cash, the recipient can purchase the item you would have chosen, or she can purchase another item that she values more highly—plus, it wastes less of the gift-giver’s time. The student said—correctly, in my estimation—that an economist ought to know better than to make that assertion. Every culture in every land in every time period has engaged in gift-giving. That should provide strong empirical evidence that giving a specific gift has some superior quality to giving cash. An economist, the student said, ought to understand that such a preponderance of evidence most likely overrides a simplistic theoretical conjecture.

Six centuries ago, Ming Dynasty emperors of China reportedly launched “treasure ships” – some of the largest vessels ever to sail the sea. These ships carried treasures to lands as distant as India and Africa. Arriving at their destinations, the ships gave— not sold—the treasures to locals.