Markets and Rationality

I think you have a bit of it yourself.

"Knowing ourselves, we would know others, on the assumption that they were human like ourselves."

Two cows were standing in a field talking, and one says, "I say, ol' chap, this mad cow disease has me in a bit of a tizzy."

"Not me," said the other, "I'm a duck."

Those Jewish movie makers back in those days were men.

Also in Golden Boy, Adolph Menjou.

And how the Communists hated him.

Great actor, but he couldn't work in Hollywood today.

Sorry, that wasn't Sam Jaffe, who was great too, but Sam Levene, in Golden Boy, 1939.

For Mises, economics began with introspection, “observation” of our own human nature. Knowing ourselves, we would know others, on the assumption that they were human like ourselves.

“It is impossible to provide conclusive evidence for the propositions that my logic is the logic of all other people and…that the categories of my action are the categories of all human action. However…these propositions work.”




For we can, in fact, coexist and not just collide with one another.

So we don't have to conduct field experiments and statistical surveys to know that man is a rational animal, applying means to ends. We already know this, by knowing ourselves, and by all our experience confirming the fact that others are human like ourselves.

Friedman’s disciples can afford to conduct their surveys only because the rest of us supporting them don’t waste our time on such frivolous pursuits. And, if they really had to support themselves, they wouldn’t either.

Sorry about your Sherry.

You shouldn't drink and blog for the same reason you shouldn't drink and drive: you might spill some.

I read K. Ackerman's post above and spewed some good Oloroso Sherry on my keyboard. But, he did encourage me to go back and reread everyting to date to see what he had glommed onto that I had missed.

Here it is:

"I'm pretty sure -- a la the important research of Leda Cosmides and John Tooby --that the human mind is not naturally reasonable or rational in any general sense. We are evolved to survive, and then evolved to survive in environments drastically different from the expansive commercial society that today spans the globe."

My mind works slightly different from Ackerman's but I agree with his critique.

To which I add this alteration of Professor Don's statements.

We are evolved to survive most definitely; but we adapt, not evolve, to survive in dramatically different scenarios other than hunter/gatherer. The global environment we face today is just another challenge to which we must adapt.

Markets exhibit feedback, not rationality.

When we run for a long time, our rate of breathing automatically increases to meet the demand for oxygen to break down the excessive lactic acid accumulations from muscle use. If we don't get enough oxygen, we get a stich in our side that makes it difficult to run. We also sweat water to lower our temperature through the endothermic process of evaporation.

All those sophisticated processes not only required no rationalization, they are not even within our power to stop.

Pain is a very effective form of hysteretic feedback designed to get us to stop doing whatever it is that we are doing. Nerve endings are the sensors that sound the pain alarm and they are concentrated most heavily in the skin. Our skin is really an environmental suit that alerts the brain to the fact that the body has sprung a leak or is undergoing rapid compression or some other thing judged to harm the machine. Our skin doesn't participate in a corrective course of action; it just provides the feedback that some action is necessary to prevent damage. Maybe with the exception of bacteria, all animals sense pain and will react to it in some way that is highly reflexive. If you are the source of the pain some animal is experiencing, you may in turn experience the effects of a different reflex, and that is the fight reflex. Bite, sting, stink, scratch, scream, stab, or stern lectures are some of the things you may experience, depending on the species you are tormenting. The fight reflex is necessary because the flinch or flight reflex doesn't always work against things that are intent on doing harm. You can flinch away from a flame, but not a shark.

Feedback is used to regulate a dynamic system.

Here is field study for rationality that anyone can do:

Sneak up behind someone and put a plastic bag over their head. If their arms go up and start ripping at their face, then they are completely rational.

Where is my damn prize? I want a prize.

...that the human mind is not naturally reasonable or rational in any general sense

Really? So it was something outside our minds that developed the concept of rational and reasonable?

And here I was thinking that reason was a function of the mind.

"You can't insult me, I'm too ignorant."

The great Sam Jaffe, in Golden Boy.

DGL,

You can call me anything you want so long as I know you are calling me and not someone else. Also, no insults please, not that you would do such a thing.

Thank you S Andrews, or may I just call you S?

Here, in a little essay of mine, are Mises' words on the subject.

The Chicago School of Superstition

Milton Friedman's empiricism is like that of ballplayers not changing their socks so long as they keep getting hits. While, to Friedman, the test of a theory is how it works out in practice, to the man he read out of the science, Ludwig von Mises, such tests can never be conclusive, for there is always the question of whether concurring events are cause and effect or coincidence.

"The question whether there is any connection between them can only be answered by" a theory "established beforehand on the ground of aprioristic reasoning...If there were no economic theory...economic facts would be nothing more than...unconnected data open to any arbitrary interpretation."

Theories of human action "are, like...logic and mathematics, a priori...not subject to verification or falsification on the ground of experience and facts....both logically and temporally antecedent to any comprehension of historical facts...a necessary requirement of any intellectual grasp of historical events. Without them we should not be able to see in the course of events anything else than kaleidoscopic change and chaotic muddle."

"There is no means of studying the complex phenomena of action other than first to abstract from change altogether, then to introduce an isolated factor provoking change, and ultimately to analyze its effects under the assumption that other things remain equal."

"Action and reason are congeneric and homogenous...two different aspects of the same thing. That reason has the power to make clear through pure ratiocination the essential features of action is a consequence of the fact that action is an offshoot of reason...Logical thinking and real life are not two separate orbits. Logic is for man the only means to master the problems of reality. What is contradictory in theory is no less contradictory in reality."

Since they are all complex, "Every historical experience is open to various interpretations and is in fact interpreted in different ways...History can neither prove nor disprove any general statement."

That is not to rule out empiricism altogether. For the basic premises of economic theory, such as the disutility of labor and variety of resources, are derived from observation. But the theory itself is antecedent to all other historical facts.

Over two decades of experiments and observations show that people act against their own interests for many, many reasons.

Or maybe they APPEAR to act against their own interest. Do motivations matter?

The Other Eric -

With all due respect, I wasn't raving. And honestly I sympathize with both sides for the reasons I mentioned - there are LOTS of definitions of rationality floating around.

What one person calls "bounded rationality" another has called "irrationality". EconLib has a great treatment of it, but there's not agreement on this treatment. And that's really my only point. I'm honestly comfortable with saying people are rational or saying that they're irrational, as long as we're up front about exactly what we mean by that. My concern with DeLong was that he wasn't giving Posner the benefit of the doubt - not that I think I fundamentally disagree with him.

The Other Eric,

DG Lesvic also said this:

"And there can be no "irrational" choice and action. Choice and action are necessarily rational. Man must act rationally, that is, apply what he believes are the most appropriate means for the attainment of his ends. The ends may be insane and the means foolish, but the action cannot be other than rational. Even a complete lunatic cannot apply what he believes are inappropriate means to the attainment of his ends."

Eric,

It took me a couple of years to read through the Civilization series. But listening to it? Wow.

Mr. Kuehn, economic rationality is not a psychology term or a character judgement. You wrote, "...who is Brad Delong to dub it "irrational"? " He didn't. It means something other than what you are ranting about.

Take a moment and read http://www.econlib.org/library/Enc/BehavioralEc...>

There's bounded, unbounded, and all sorts of rational behavior that lives in economics books. A really good discussion of this is at:

http://www.econlib.org/library/NPDBooks/Thirlby...>

DG, you might be trying to make a point about praxeology but it falls flat. "Rational" economic models are giving way to more realistic data.

Old, non-behavioral non-experimental, economics tries to describe how people, groups, and entire societies interact using the rationality of human action as its foundation. That assumption allows for simple models and theorems describing the courses of actions under given circumstances.

You wrote, following this theme, "Man must act rationally, that is, apply what he believes are the most appropriate means for the attainment of his ends."

That just isn't true. Over two decades of experiments and observations show that people act against their own interests for many, many reasons. As individuals and in groups we form opinions that contradict what we see and do, lie and cheat ourselves and others while claiming virtue and foresight, and deny previous choices in the face of conflicting information.

I think Sam is right that it all needs to start with exactly what we're defining as "rationality" - and vidyohs alludes to it as well with the idea that we can be both rational and irrational.

Don's mention of the current crisis reminds me of a recent minor spat between Posner and DeLong over Delong's review of Posner's new book. DeLong claims that Posner inappropriately clings to the idea of rational markets, when this crisis should prove the common irrationality of markets. Posner's response is very close to my own when I first read DeLong's review - namely "oh, give me a break, Brad!". If we choose to define irrationality as a preoccupation with short-term gains without necessarily worrying about long-term viability, then sure people might have acted irrationally. But that seems to be a case of assuming your own conclusions. There is a rationality to pursuing short-term profits. If that sort of short-termism is really what people want out of their stock portfolio, who is Brad Delong to dub it "irrational"? "Unstable", perhaps, but I don't think Posner was wrong to say that the actors were rationally responding to the incentives they were faced with. Too often, I think we ignore the extent to which "rational" and "irrational" are such value laden terms. I like the developments of behavioral economics, and the broad strokes that these people are pointing out. But I think the fighting over "rationality" or "irrationality" is often besides the point. People respond to incentives and their own interests, and they also probably respond to norms and other factors that may not be as easily defined as their "self interest". If you want to call that irrational, fine. One could also make a case (as Posner has), that that behavior could be defined as "rational" as well. The important thing is whether the dynamics we highlight are accurate or not - not whether they should be labeled "rational" or "irrational".

For the record, the unabridged audio version of Durant's The Story of Civilization is THE best commuter companion you can ask for if you have a long drive/train ride. Over several months I listened to the entire series and can't praise the work enough.

One could look at that data and suggest that market efficiency requires a confederacy of dunces, pulling an a multiplexity of directions. If too many members of a market are willing to cooperate on a single course then the correcting features of diversity are overcome.

It is possible that the root causes of today's economic woes are from homogenizing regulation on markets that dampen the complexity and remove variation of choice. The data on individual preferences above would not rule out the prediction that the more a competitive and complex market is bound, the more likely it is to topple.

Humans are complex creatures, Don. We have the ability to display rational behavior and irrational behavior.

In my view which is displayed is in direct proportion to the amount of societal pressure to behave is being observed at any one particular moment.

I'm not really sure what you're talking about and what you're trying to get at, but, a few observations.

You wrote,

"List and Millimet's findings are not the product of armchair theorizing; they are the result of controlled experiments with real people. "

There can be no "controlled experiments with real people," just "armchair theorizing," no empirical, just theoretical economics.

The only "controlled experiments" are those that the economist conducts within his own mind, in the imaginary construction of an unchanging universe, into which he injects a single factor of change, and analyzes its effects in isolation from all other possible factors of change.

He cannot do so in the field, or a classroom. His imagination is the only "controlled laboratory" of economics.

And there can be no "irrational" choice and action. Choice and action are necessarily rational. Man must act rationally, that is, apply what he believes are the most appropriate means for the attainment of his ends. The ends may be insane and the means foolish, but the action cannot be other than rational. Even a complete lunatic cannot apply what he believes are inappropriate means to the attainment of his ends.

Is there a definition of "rationality" as used in the context of economics that I should know about.

When we say that someone is acting rationally, how can we be sure. Perhaps more accurate to say: "I think that person is acting rationally." Do that person's motivations matter?

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