Monday, November 28, 2011

What is rational behavior?

The NY Times has a good book review of Daniel Kahneman's Thinking Fast and Slow. Kahneman, a psychologist, won the Nobel Prize in Economics for documenting departures from rationality. Students will recognize his work in sections from our textbook from Chapters 3 (Psychological Biases in Decision Making) and in Chapter 12 (Psychological Pricing).

What interested me in the review was the bigger idea that these departures from rationality--documented in psychology labs using student subjects--may actually be rational in the bigger sense:

Even if we could rid ourselves of the biases and illusions identified in this book — and Kahneman, citing his own lack of progress in overcoming them, doubts that we can — it is by no means clear that this would make our lives go better. And that raises a fundamental question: What is the point of rationality? We are, after all, Darwinian survivors. Our everyday reasoning abilities have evolved to cope efficiently with a complex and dynamic environment. They are thus likely to be adaptive in this environment, even if they can be tripped up in the psychologist’s somewhat artificial experiments. Where do the norms of rationality come from, if they are not an idealization of the way humans actually reason in their ordinary lives? As a species, we can no more be pervasively biased in our judgments than we can be pervasively ungrammatical in our use of language — or so critics of research like Kahneman and Tversky’s contend.

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