Rationality in Economics

This paper takes up David Gauthier's most recent defense of the rationality of cooperation in prisoner's dilemmas. In that defense, Gauthier argues for a Pareto-optimizing theory of rational choice. According to Gauthier, rational action should sometimes aim at Pareto-optimization, and cooperation in prisoner's dilemmas is rational because it is Pareto-optimizing. I argue that Pareto-optimization cannot justify cooperation in the prisoner's dilemma in a manner that is also consistent with Gauthier's other desiderata. Either: the rationality of cooperation must derive from what (...) is beneficial for the group rather than what is beneficial for the individual, leaving the individual qua individual without any reason to cooperate, or Gauthier cannot explain why defecting in prisoner's dilemmas is not also rational. (shrink)

The impossibility results in judgement aggregation show a clash between fair aggregation procedures and rational collective outcomes. In this paper, we are interested in analysing the notion of rational outcome by proposing a proof-theoretical understanding of collective rationality. In particular, we use the analysis of proofs and inferences provided by linear logic in order to define a fine-grained notion of group reasoning that allows for studying collective rationality with respect to a number of logics. We analyse the well-known paradoxes in (...) judgement aggregation and we pinpoint the reasoning steps that trigger the inconsistencies. Moreover, we extend the map of possibility and impossibility results in judgement aggregation by discussing the case of substructural logics. In particular, we show that there exist fragments of linear logic for which general possibility results can be obtained. (shrink)

In this paper, I investigate the relationship between preference and judgment aggregation, using the notion of ranking judgment introduced in List and Pettit. Ranking judgments were introduced in order to state the logical connections between the impossibility theorem of aggregating sets of judgments and Arrow’s theorem. I present a proof of the theorem concerning ranking judgments as a corollary of Arrow’s theorem, extending the translation between preferences and judgments defined in List and Pettit to the conditions on the aggregation procedure.

Nudge is a concept of policy intervention that originates in Thaler and Sunstein's (2008) popular eponymous book. Following their own hints, we distinguish three properties of nudge interventions: they redirect individual choices by only slightly altering choice conditions (here nudge 1), they use rationality failures instrumentally (here nudge 2), and they alleviate the unfavourable effects of these failures (here nudge 3). We explore each property in semantic detail and show that no entailment relation holds between them. This calls into question (...) the theoretical unity of nudge, as intended by Thaler and Sunstein and most followers. We eventually recommend pursuing each property separately, both in policy research and at the foundational level. We particularly emphasize the need of reconsidering the respective roles of decision theory and behavioural economics to delineate nudge 2 correctly. The paper differs from most of the literature in focusing on the definitional rather than the normative problems of nudge. (shrink)

John Rawls’s difference principle says that we should change our economy if doing so is better for the worst-off group, on the condition that certain basic rights are secured. This paper presents a kind of case that challenges the principle. If we modify the principle to cope with the challenge, we open the way to a Sorites paradox.

Social science employs teleological explanations which depend upon the rationality principle, according to which people exhibit instrumental rationality. Popper points out that people also exhibit critical rationality, the tendency to stand back from, and to question or criticise, their views. I explain how our critical rationality impugns the explanatory value of the rationality principle and thereby threatens the very possibility of social science. I discuss the relationship between instrumental and critical rationality and show how we can reconcile our critical rationality (...) with the possibility of social science if we invoke Popper’s conception of limited rationality and his indeterminism. (shrink)

This paper focuses on tacit versus explicit uses of plural performance metrics as a primary methodological characteristic. This characteristic usefully distinguishes two schools of normative analysis and their approaches to normative interpretations of bounded rationality. Both schools of thought make normative claims about bounded rationality by comparing the performance of decision procedures using more than one performance metric. The consistency school makes tacit reference to performance metrics outside its primary axiomatic framework, but lexicographically promotes internal axiomatic consistency as the primary, (...) and in most cases sufficient, normative outcome with which to undertake welfare comparisons. The consistency school's axiomatization program, in both neoclassical and behavioral forms, pre-commits to welfare interpretations that follow a hierarchy of rationalities based on the stringency of restrictions that different axiomatizations impose on choice data. In contrast, the ecological rational.. (shrink)

No evangelistic erroneous network of ideas can guarantee the satisfaction of these two demands : (1) propagate the network without revision and (2) completely insulate itself against losses in credibility and adherents through criticism. If a network of ideas is false, or inconsistent or fails to solve its intended problem, or unfeasible, or is too costly in terms of necessarily forsaken goals, its acceptability may be undermined given only true assumptions and valid arguments. People prefer to adopt ideologies that (i) (...) are logically consistent, (ii) are more truth-like and of higher information content than their rivals, (iii) are systematically organised, (iv) solve their problems better than their rivals, (v) do not contain unfeasible demands, and (vi) do not contain uneconomic demands. Truth and validity therefore act as Darwinian-like filters on ideologies. Using Popper's notion of situational analysis and with reference to Darwinian evolution, considered as a special case of the former, and Bartley's theory of comprehensively critical rationalism I argue that a propagandist cannot guarantee his message or his movement from sound criticism. All positions are in a methodological sense open to argument. Moreover, the logic of a propagandist's situation constrains him into making his message and himself open to criticism in order to maximize its chances of being propagated through the population. But he then loses control of the message in two respects. Firstly, his audience are disposed to select from the competing ideas they encounter those that satisfy (i) to (vi) because of man's evolutionary history. Secondly, he cannot guarantee protection from criticism even a privileged section of his message because he cannot predict in a systematic way what logical repercussions each protective reformulation of the ideology will have on other sections of the ideology and what criticism the ideology will encounter. He cannot do the latter because of certain logical properties of theories that endow them with unfathomable depths. Marxism and Freudianism serve as case studies, especially for the analysis of Popper's notion of the immunizing stratagem, a methodological/logical device that is supposed to save theories from criticism. "Immunizing stratagems" either abandon the ideology they are meant to protect or seriously lower its chances of being reproduced. (shrink)

From April 8th to 10th 2013, the Herbert Simon Society held its first General Conference in New York. About fifty researchers from different countries and working in different areas attended the event. The conference focused on three topics which were identified as particularly relevant in the development of Simonian thought: duality of mind, creativity and alternative theories to rational expectations. A first Herbert Simon Honorary Lecture by Gerd Gigerenzer opened the conference. Gerg Gigerenzer was later elected as Chairman of the (...) Herbert Simon Society. Joseph Stiglitz closed the conference with the second Herbert Simon Honorary Lecture.The Herbert A. Simon Society brings together economists, social and cognitive scientists engaged in critical issues such as bounded rationality, problem solving, simulation of human thought and creativity. In particular, it gathers some of the most important economists who try to reformulate economic theory by starting from some of the non-neoclassi. (shrink)

Prospective Science Heads and prospective Heads of School all have expectations for the nature of the role that they apply for. This research provides prospective Heads of School and prospective Science Heads in schools based on a Christian philosophy with a pool of information on how the realities in these leadership positions differ from the expectations held by other prospective applicants, the expectations of governance (the employers) and the past expectations of incumbents.

There is, in Sarajevo, a man who comes out into the streets each day and plays his cello on the sidewalk. He does this at the same time each day, no matter how much shooting or shelling is going on, no matter how great the danger to himself. He describes himself as having decided to take a stand for beauty in the face of horror. Can the rational choice paradigm, as currently practiced in the various disciplines of economics, philosophy, political (...) science, and law, offer an account of this man's decision and his behavior? This admirable man seems to be a rebuke to the philosophies of calculated self-interest. Can we offer some account of his behavior, without descending into the tautological claim that he did what he did because he wanted to? Can we offer some insight into his wants that will make him intelligible? And not only intelligible, but can we account for him in a way that highlights his admirability, rather than suggesting that he is in some way an aberration, or perhaps even a fool? There is a deep disorder within the human condition. All of the essays in the present volume point to this fact in one way or another. Some characterize the disorder as a conflict between virtue and self-interest. Others point to the dichotomy between the individual and other persons as being the source of the tension between morality and self-interest. Some of the essays attempt to resolve the tension by collapsing the two categories into each other. (shrink)

(1993). The rationality of beliefs at the frontier of social science: Comments on Boudon's paper. International Studies in the Philosophy of Science: Vol. 7, No. 1, pp. 51-53.

(1993). Perfect and workable rationality: A comment on Raymond Boudon's paper. International Studies in the Philosophy of Science: Vol. 7, No. 1, pp. 41-43.

That the rationality of individual people is ‘bounded’ – that is, finite in scope and representational reach, and constrained by the opportunity cost of time – cannot reasonably be controversial as an empirical matter. In this context, the paper addresses the question as to why, if economics is an empirical science, economists introduce bounds on the rationality of agents in their models only grudgingly and partially. The answer defended in the paper is that most economists are interested primarily in markets (...) and only secondarily in the dynamics of individual decisions – specifically, they are interested in these dynamics mainly insofar as they might systematically influence the most useful approaches to modeling interesting markets. In market contexts, bounds on rationality are typically generated by institutional and informational properties specific to the market in question, which arise and are sustained by structural dynamics that do not originate in or reduce to individuals' decisions or psychologic.. (shrink)

Rationality has been a principle widely assumed in economics from early on. In contrast, rationality in the formation of economic expectations is rather new. Since the term “rational expectations” has meanwhile become a kind of slogan for diverse issues in economics as in related fields, there is some danger of authors’ not always being aware of the true meaning of this technical term. Sometimes it is used, in a context where expectation formation about uncertain events is essential, as if rational (...) expectations solved this fundamental problem. (shrink)

The paper surveys selected alternative conceptions of rationality in contemporary and (especially) traditional economics and sociology. While the status of rationality as one of the master concepts, subjects and objectives of social science and philosophy has been further promoted in contemporary economics and sociology, questions often arise among economists and sociologists themselves as to its meaning or definition. As an attempt to help address this issue, the paper selects and examines a (limited) number of pertinent definitions and conceptions of rationality (...) from both economic and sociological theory. By virtue of its coverage of economics and sociology, this study is thoroughly interdisciplinary and contributes toward filling in a void in the current literature in which such studies are relatively rare. (shrink)

Inspired by recent developments in science studies, this book offers an innovative type of analysis of the recent history of rational expectations economics. In the course of exploring the multiple dimensions of rational expectations analysis, Professor Sent focuses on the work of Thomas Sargent, an instrumental pioneer in the development of this school of thought. The investigation attempts to avoid a Whiggish history that sees Sargent's development as inevitably progressing to better and better economic analysis. Instead, it provides an illustration (...) of what happened to the approach through a contextualization of Sargent's work vis-á-vis that of other scholars and ideas. The treatment aims to illuminate some of the shifting negotiations and alliances that characterize the rise and shift of direction in rational expectations economics. The Evolving Rationality of Rational Expectations won the 1998 Gunnar Myrdal Prize of the European Association for Evolutionary Political Economy for the best monograph on a theme broadly in accord with the EAEPE Theoretical Perspectives. (shrink)

Growing out of a conference on Expectations Formation and Economic Disequilibrium held in New York City in 1981, the papers in this volume provide a complex view of market processes in which individual rationality is no guarantee of convergence to the 'correct' model and the equilibrium coordination of agents' plans. They reject the 'optimality' argument for the rational expectations hypothesis, opening the door to other hypotheses of optimal expectations of agents in the decentralized market economy.

This paper discusses the validity of nudges to tackle time-inconsistent behaviours. I show that libertarian paternalism is grounded on a peculiar model of personal identity, and that the argument according to which nudges may improve one’s self-assessed well-being can be seriously questioned. I show that time inconsistencies do not necessarily reveal that the decision maker is irrational: they can also be the result of discounting over the degree of psychological connectedness between our successive selves rather than over time. Time inconsistency (...) can call for paternalism if and only if we accept that an individual is characterised by stable “true” preferences over time-dependent outcomes, and that she is rationally required to make time-consistent choices. This model is descriptively and normatively questionable. I then argue that behavioural findings may still justify paternalistic interventions, but on a non-welfarist basis. (shrink)

The aim of this contribution is to provide an overview of conceptual approaches to incorporating a decision maker’s non-knowledge into economic theory. We will focus here on the particular kind of non-knowledge which we consider to be one of the most important for economic discussions: non-knowledge of possible consequence-relevant uncertain events which a decision maker would have to take into account when selecting between different strategies.

Economic pressures, mounting environmental, security and health requirements, are all critical factors that shape economic action. With regard to environmental protection, an economic entity acting as homo oeconomicus finds himself in a situation resembling a prisoner’s dilemma. Signposts for a possible resolution of this dilemma include an environmental management system, a system of environmental law based on the principles of environmental ethics, and a new conception of human nature.

One approach to moral economy wishes to show that it is rational to be moral. As rational morality has received little attention from economics, as opposed to political philosophy, this article examines it in an economics framework. Rational morality refers primarily to individual behaviour so that one may also speak of it as moral microeconomics. When a group of agents are disposed to constrain their maximisation, that behaviour may be considered rational. However, this relies on ‘moralised’ assumptions about individual behaviour. (...) Constrained maximisation may also rely on repeated interactions within social structures that then transmit information thus serving as enforcement mechanisms. In this way agents obtain knowledge of others’ past behaviour and choose their interlocutors accordingly. Thus, it pays to behave morally as it will attract similarly disposed agents to participate in cooperative ventures for mutual advantage. An analysis of rational morality on the individual level demonstrates how this.. (shrink)

We introduce a “reason-based” framework for explaining and predicting individual choices. It captures the idea that a decision-maker focuses on some but not all properties of the options and chooses an option whose motivationally salient properties he/she most prefers. Reason-based explanations allow us to distinguish between two kinds of context-dependent choice: the motivationally salient properties may (i) vary across choice contexts, and (ii) include not only “intrinsic” properties of the options, but also “context-related” properties. Our framework can accommodate boundedly rational (...) and sophisticatedly rational choice. Since properties can be recombined in new ways, it also offers resources for predicting choices in unobserved contexts. (shrink)

When the term `rational' is used in formal economic theory, a strict definition is implicit. This strict definition cannot accommodate the complexities of our everyday ideas of what is rational. The concept of rationality that is embedded in our language is not a morally neutral one. It has always been believed possible to argue rationally about the worthiness of goals, the legitimacy of claim to rights, the existence of obligations or duties. Outside the discussions of the social sciences, argument concerning (...) the rationality of a choice or action is never a purely technical, value-free discourse.This book is devoted to an examination of the limitations of the various formulations and interpretations of the concept of rationality which has been developed by economic theorists. It presents a series of challenges to the formal concept of rationality. This conecept has spread from economics and decision theory through the social sciences and policy studies. It forms the implicit foundation for the pronouncement of policy-makers, whose recommendations can seriously affect the society and environment in which we live.The book begins with the claim of neoclassical economics that a rational agent maximizes utility. Next it considers the later, more austere construction of rationality where a rational agent was simply one whose choices or actions were consistent. The discussion then turns to who, dissatisfied with this bare notion of consistency, claimed that a rational agent was one whose choices or actions were directed towards maximization of the agent's self-interested aims - a view they attributed to Adam Smith. Once the character of the individual agent has been established, neoclassical theory has always regarded the analysis of allocation among these agents as its supreme task. This is the subject of chapters 6 and 7.Vivian Walsh examines the philosophical implications of the replacement of the ordinary concept of rationality by the formal concepts constructed to fit the requirements of general equilibrium theory, decision theory, and game theory. He argues that the current intellectual climate, which has moved away from formalism, necessitates the reexamination of the concepts of rationality which scholars and policy-makers, many of whom were not economists, were ready to adopt directly or indirectly from economic theory in the recent past.The final two chapters are intended to contrast sharply with the rest of the book. They offer a readable and minimally technical account of the much smaller role played by the concept of rational choice in the work of a present-day school which derives from the eighteenth- and nineteenth-century classical economists. (shrink)

Experimental observations have shown that economic agents behave in ways different from the maximization of any utility function. Herbert Simon sought to deal with this by positing that individuals do not maximize, but rather "satisfice." This was a radical departure from the traditional economic framework, and one that still has not been adequately formalized. But Simon's suggestion is only the smallest part of what is needed for a theory that reflects the actual behavior. For instance, Simon's framework cannot deal with (...) the observation that the act of choice changes the chooser. This dissertation is further developing Simon's original ideas through embracing John Dewey's transactional thinking to attain an adequate theory of economic choice that accounts for boundedly rational agents. ;I clarify that substantive rationality and bounded rationality share the same basic utilitarian assumption of predetermined goals. In terms of a Deweyan analysis, the idea of utilitarian "optimization" ultimately guides and constrains both theories. But empirical study of choice behavior and the behavior of subjects in experimental laboratories, both indicate that neither substantive nor procedural rationality can effectively account for actual economic choices. ;I emphasize the importance of treating bounded rationality without reference to the rational framework. To me, bounded rationality implies a realistic picture of behavior, which is associated with emerging goals and not ones that exist prior to the making of a choice. I consider uncertainty as a normal characteristic of the situation, which in turn allows consideration of acting based on inconsistent information, just as people actually do. The basis of a systematic approach to behavior that can capture inconsistency is developed by Tom Burke. He mathematizes Dewey's logic. He allows for impossible worlds in the set of states. Thus, not only can the initial state space hold inconsistent states, the information set can include mutually inconsistent elements. ;So the current neoclassical paradigm resembles the representative realism, but is there any good reason why we should accept this methodology as economists? Whatever one's ultimate metaphysics and epistemology, I want to show that an alternative approach to economic decision-making may prove highly useful in theory and practice. (shrink)

Weirich examines three competing views entertained by economic theory about the instrumental rationality of decisions: the first says to maximize self-interest, the second to maximize utility, and the third to satisfice, that is, to adopt a satisfactory option. Critics argue that the first view is too narrow, that the second overlooks the benefits of teamwork and planning, and that the third, when carefully formulated, reduces to the second. Weirich defends a refined version of the principle to maximize utility. A broad (...) conception of utility makes it responsive to the motives and benefits critics allege it overlooks. He discusses generalizations of utility theory to extend it to nonquantitative cases and other cases with nonstandard features. (shrink)

In economics in situations where there is uncertainty one has to attribute some attitude to handling this uncertainty to individuals. The original idea was to assume that “people do not make systematic mistakes” for which Muth coined the term “rational expectations”. This was replaced by a much more formal vision which suggested that people fully understand how the economy evolves. In this paper I will argue that the foundations of the “rational expectations” hypothesis which has underpinned most recent modern macroeconomic (...) models, which have, in turn, been used for policymaking, are unsound. From a philosophical point of view the idea that agents can not only forecast the evolution of their environment but also their own evolution seems unjustified. If agents do manage to coordinate on specific expectations these may not be rational and can be self fulfilling. From an econometric point of view, when there are changes in the evolution of the economy, it is not rational to satisfy the hypothesis. Furthermore the empirical and experimental evidence suggests that we should abandon this route. (shrink)