Wandering Thoughts

August 2, 2009

Rational Irrationality

Filed under: Ramblings and Musings — terence @ 9:34 pm

William Easterly digests Vernon L Smith so we don’t have to.  The interesting, if not completely novel, insight is that that which appears irrational in the experiment actually serves a deeper rationality in the real world. Irrationally, players of Prisoner’s Dilemma type games don’t defect and betray their partners as often as you would expect, while in other experimental games a preference for fairness trumps rational self interest. On the surface we’re nowhere near as rational nor self-interested as are the representations of ourselves that populate neo-classical economics. And yet, in real life, where games are played time and time again, and where no woman is an island, being loyal and fair is a form of a rational strategy for maximising one’s own welfare. Often enough, the treacherous are betrayed in return. And the unfair excluded from exchange. And so, as communal creatures, somewhere under our first layer of consciousness we’ve developed preferences for fairness and trust in others, the propensity to exhibit such behaviour ourselves and the tendency to create social norms to foster such behavior. And, broadly speaking this is a good for our self interest.

So far so good, but you get the sense that from this insight Smith and Easterly are then happy to pull out the stumps, declare victory and ignore behavioral economics happily ever after. Which would be odd because the fact that our irrationality is kind of rational at a deeper level doesn’t leave it any less at odds with the model of behaviour underpinning neo-classical economics…

…to be continued (and hopefully made coherent too…)

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