This is one of those rare moments where the usually horribly heterodox economist, me,
defends orthodox economic theory. So, looked at very closely, orthodox microeconomic
says nothing at all about peoples’ preferences themselves, which presumably involve their
emotional reactions to various things. What is assumed is certain things about these
preferences, that people know what they are, that they exhibit continuity, that they have
a degree of internal consistency in the sense of exhibiting transitivity, and it also
makes people behave more “rationall” and exhibit continuous demand functions if their
utility functions exhibit convexity. So, rationality is not about what your preferences
are or the degree to which they are based on one’s emotions. They are that one know
what they are, that they have a degree of internal coherence or consistency, and the,
the biggie, that people actually act on the basis of their real preferences.
A lot of the problems regarding “irrationality” involve people behaving in internally
consistent manners, especially over time. Behavioral economists are now arguing it out
whether one should deal with this via multiple personality (or preference systems) models
or approaches that stress focusing on “rationality” and keeping mind one’s “real” preferences.
Thus, hyperbolic discounting involves “time inconsistency.” I want things now that I shall
regret having wanted so much later. I eat the candy bar now and wake up fat later, etc. etc.
Is this a combat of two preference systems or just “irrationality,” People like Matthew
Rabin who tend to use the latter approch, in fact say that the goal is to have people be
“rational,” to know their own real preferences and to act on them. If they really do not
mind being fat, then go ahead and eat the candy bar. But in any case, it is perfectly OK
either way to have the caring about being fat or not caring about being fat to be based on
one’s emotional reactions. One should undertand one’s own emotional reactions. That is
rationality.
This is one of those rare moments where the usually horribly heterodox economist, me, defends orthodox economic theory. So, looked at very closely, orthodox microeconomic says nothing at all about peoples’ preferences themselves, which presumably involve their emotional reactions to various things. What is assumed is certain things about these preferences, that people know what they are, that they exhibit continuity, that they have a degree of internal consistency in the sense of exhibiting transitivity, and it also makes people behave more “rationall” and exhibit continuous demand functions if their utility functions exhibit convexity. So, rationality is not about what your preferences are or the degree to which they are based on one’s emotions. They are that one know what they are, that they have a degree of internal coherence or consistency, and the, the biggie, that people actually act on the basis of their real preferences.
A lot of the problems regarding “irrationality” involve people behaving in internally consistent manners, especially over time. Behavioral economists are now arguing it out whether one should deal with this via multiple personality (or preference systems) models or approaches that stress focusing on “rationality” and keeping mind one’s “real” preferences. Thus, hyperbolic discounting involves “time inconsistency.” I want things now that I shall regret having wanted so much later. I eat the candy bar now and wake up fat later, etc. etc. Is this a combat of two preference systems or just “irrationality,” People like Matthew Rabin who tend to use the latter approch, in fact say that the goal is to have people be “rational,” to know their own real preferences and to act on them. If they really do not mind being fat, then go ahead and eat the candy bar. But in any case, it is perfectly OK either way to have the caring about being fat or not caring about being fat to be based on one’s emotional reactions. One should undertand one’s own emotional reactions. That is rationality.