Yes, I agree with what you are saying here. It is certainly important concept to understand. However, I think you would agree that it doesn’t overturn the concept of rationality that economists use for more generally analyzing micro-economic issues. The assumption of rationality of actors in an economic model has proven itself to be a very useful assumption.
I guess that pretty much kills the canard that economics as an “axiomatic-deductive” science can have any validity.
Good grief, it does no such thing.
More to the point:
This is not a helpful place to start. Rationality is certainly not defined as “people acting in their best interest.” Rationality is defined as goal-directed behavior, that is, behavior that is not completely stochastic. Whether or not utility-maximizing behavior is in the actor’s “best interest” is an ex post value judgment which is completely irrelevant to economics. Smoking crack may be economically rational for me even though it is by no means in my best interest, as it were. Economic rationality is absolutely not normative nor does it place any constraints on outcomes. It simply describes how one makes choices when faced with scarcity and limited information. Rational decision-makers frequently make poor choices.
There is some very good economics these days that builds “constrained rationality” into its models. For example, prospect theory tells us that people tend to misjudge probabilities of future events as those probabilities grow closer either to unity or zero. Consider the lottery. The motto for the lottery in my state is, “Hey, you never know.” This illustrates prospect theory quite eloquently. Thus imperfect or constrained rationality can be used in an “axiomatic-deductive” context to drive powerful and empirically validated hypotheses.
Cite? Argument in support? Anything?
Why would you say this? It’s perfectly rational. Star athletes are worth more than surgeons. It’s not a matter of opinion, it’s a fact.
But far more people want to watch sporting events than want to have their brains operated on. More people watch pro sporting events in North America every year than all the human beings who have had brain surgery in the entire history of medicine. More demand, higher prices. It’s just math.
Pro sports salaries are quite rational.
But all kinds of people made MILLIONS in the dot com craze. There are 35-year-olds retired today on dot com money. Clearly, it sure made sense for a lot of people. “Bad timing” is not “irrational.”
Broadly speaking, I agree. However markets are made of people, and I think it makes more sense to consider the sometime irrational behavior of markets in these terms, instead of trying to shoehorn absurd decisions into a rational framework. But for the most part the Fed doesn’t have to worry about this stuff when setting interest rates.
Hold on. Let’s back up a second here.
Just how are you planning on doing away with the market? Given that “the market” exists any time someone has something that someone else wants, and is willing to swap for it, buy it, etc., isn’t that rather illogical in itself? My kid wants a cookie, so I tell him to clean his room first. There is a market. I have a job. There is a market. Exactly what are you planning on replacing human nature with?
I had hoped I had defined “best interest” to make your objections moot. We are speaking of economic decisions, and the decision to smoke crack, or cigarettes, does not fall into this. We’re also only speaking of the information available at the time. Betting, no matter what the odds are, may or may not be in one’s best interest - betting heavily against the odds, so that one’s expected value is negative, always is. (My daughter thinks behavioral economists all around the country are faithfully taping Deal or No Deal. In the first example I gave all information was available to both players. Ditto for the second. Another common example is when people request rewards for delaying either a penalty or a benefit with inconsistent discount rates over time.
I think it is fair to say that some purchasers of dot.com stock during the bubble were not behaving irrationally (maybe stupidly.) But purchasers of tulips at the height of that bubble?
That is another good example - in fact in our paper we consider the perceived cost of low probability failures. However I am not sure how you would combine an axiomatic-deductive system with behaviors that can only be determined empirically. I don’t see how such a system could predict people’s real behaviors - even considered en masse, unless you also propose an axiomatic-deductive system of psychology.
Any college level basic economics text written in the past fifteen or twenty years. Honestly, rather than presumptuously assume that I have no arguments in support, why don’t you pick up a book on social choice theory and economics?
The first book I pulled off my own shelf is the classic Positive Political Theory I: Collective Preference by Austen-Smith and Banks. Page 6. The definition of rationality and rationalizable choice is at the very beginning of the book.
Austen-Smith and Banks then provide a formal definition of a choice function and the idea of rationalizability. Informally, rationalizability implies that there is a binary preference relation, i.e., “I prefer outcome X to outcome Y” such that for all possible outcomes in the set of outcomes, the outcomes in the “choice set” are the outcomes preferred to all of the others depending on the choice rule.
There are other useful formal properties of rationality, like transitivity and acyclicity. These ensure that the choice set is, among other things, not empty.
The most important thing to remember is that economics and social choice theory concern themselves with preferences over outcomes. You are rational because your preferences over outcomes meet some basic restrictions and because you have a personal ordering function that can consistently distinguish between them and put them in order of desirability.
Rationality does not mean that people automatically make the best choices that maximize the likelihood of achieving their desired outcomes. People usually try to, but due to incomplete information and scarcity, they often fail. Economics is all about why the aggregate behavior of rational individuals can yield spectacular social failures.
Don’t take my word for it. I seem to recall that you are a librarian. Do you have access to JSTOR? If so, I would be more than happy to suggest reams of formal economic literature for you to read.
Smoking crack is a fundamentally economic decision and I am quite surprised that you would eliminate it at all. I have scarce monetary resources, I have scarce health/bodily resources, and I have a prior belief that each marginal pipe hit will increase the probability of addiction and death. If my expected utility is still maximized by smoking, I’ll do it.
Tell me how this is not an economic decision?
Don’t make me dig out Israel’s history of the Dutch Republic. 
I would say prima facie that they were not acting stupidly. Suppose you know that there is a bubble and that eventually, it will burst. You have prior beliefs that the other actors either know or they don’t know. If there is one actor whom you believe does not know that the bubble is on the way out, you might be maximizing your utility by buying anyway and betting on the fact that you are not going to be the person stuck holding the bag. I am getting some ideas for a formal model here.
A fair question. As I am sure you are aware, in a lot of economic models, preferences among individuals are assumed to follow some sort of probability distribution. I personally like assuming the uniform distribution, because I suck at math and it is easy to integrate.
Seriously, learning more about behavioral models allows an analyst to fine-tune both how preferences are distributed among populations and, perhaps more importantly, how people update their prior beliefs when faced with new information. If patterns emerge that, say, do not stricly follow Bayes’ Theorem, an economist can actually incorporate this into a game, generate hypotheses, and test them. I believe that the results might be more informative and even accurate than those driven by models that assume that everyone updates their priors in a perfectly Bayesian way. We have to assume the latter until we can get good behavioral data.
Of course, this doesn’t actually do anything whatsoever to undermine rationality as defined by classical economics. All it does it show that the people in pool B placed some (relatively low) value on metaphorically slapping the people in pool A who made insultingly low offers. Rationality in orthodox game theory is very nearly tautological - we derive a person’s attributions of utility to choices based on what she chooses, and declare her to be rational because she chooses based on her attributions of utility.
See? It’s just that easy!
:dubious: :rolleyes:
-FrL-
Care to elaborate?
I mean to say that it is not an open option to simply quit ones job and shop around for a new one on a whim. Your post made it sound like this is just something someone could decide to do one day. Most people can’t be expected to be able to do this. We’ve got bills to pay etc.
I have never found it convincing when I have heard people say that employees have alot of, so to speak, “bargaining power” against the market. The overhead cost involved in trying to change employment is so great that for most employed people, it is the best decision to stay in situations which are far from ideal. And it happens that this is all to the employer’s advantage. So, in general, employer and employee do not come to the bargaining table as equals.
-FrL-
Couple of things here. First off, no one said you had to quit to find another job. I’m not sure how things are done by you, but I’ve NEVER quit my old job then gone in search of new employment.
That being the case…of COURSE its something that just about anyone can simply decide one day to do. You see, you decide you don’t like your current job, then you buy a news paper and look at the want ads (or you go on Monster.com, or you wander the streets like Kane in your off hours searching for a job, etc etc), you apply for a job, then if they are interested they ask you in for an interview (which you wisely schedule for your lunch hour, or for some other time where it won’t put your current job in jeopardy). If they like you then they make you an offer…and if that offer is acceptable, then bobs your uncle! New job! Easy, no?
I think ‘most people’, at least here in the US, do it just about that way in fact. Its not exactly rocket science.
Secondly, they were taking about Brain Surgeons in that example. Do you seriously think that the average Brain Surgeon here in the US is going to have a lot of trouble shopping their skill set around?
You’ve never heard of the barganing power of collective labor? Things like Labor Unions? Where have you been all your life? Did you ever hear about the demand for IT personnel (engineers, technicians, hell anyone who could SPELL ‘IT’ for that matter) during the 90’s? There was a huge shortage of trained (and even semi-trained, partially trained, untrained but could spell ‘IT’) labor during that thing we fondly remember as the Bubble. I can remember anyone who knew how to turn on a computer and could spell ‘Microsoft’ being snapped up for top price…all because there was a huge demand for such labor. From my own perspective, I went from being an IT engineer in 1990 making maybe $50k/year to being a level IV engineer in 2000 making something like 250k/year (not including bonus)…which is not a bad jump in a decade and for doing essentially the exact same job I did in 1990.
In a nut shell, if you are in a job that anyone can do…well, your individual bargaining power is somewhat limited by the fact that, hey…anyone can do your job and if you don’t want to do it someone else will be more than happy to do it for you. As you shift that however (due to more skills required, education, or even inate personal talent) the demand shifts as well…as does the equation between employeer and employee. Someone who is a skilled plumber, for instance, or a skilled crane operator is going to demand higher salaries (and also be able to pick and choose their jobs) than someone who is running the register at McDonnalds…especially if there is a shortage of such people and businesses need to compete for their services (like in my IT example). Eventually you get to unique individuals who bring to the table something only they can do, or that they do better than anyone else (ball players for example, or some CEO’s of companies). These folks are going to command top dollar simply by reason of the fact that there is only a very small number of folks who can do what they can do…while the demand for their services may be very large indeed.
So…making a blanket statement that everything is always to the employer’s advantage (or your particular strategy for job hunting 
) is a bit simplistic…as well as being wrong. Indeed, sometimes things are in the favor of the employer…but sometimes its an employee’s market. Especially if we also take into account things like collective labor bargaining and such…
-XT
I was answering one blanket statement with another.
Most of your points are well taken.* It’s not always easy to change jobs, but you’re right to point out that it’s not always hard. My claims were admittedly exaggerated.
The person I was responding to seemed to be assuming that if someone doesn’t like their present job situation, it is automatically available to them to simply change it willy nilly. But this is false. You have to be either fortunate enough to be in a position to find a better job elsewhere doing what you have the skills to do, or you have to be fortunate enough to be able to start doing something else entirely while maintaining a standard of living you find acceptable after making such a choice.
If you are not fortunate enough to be in either of these positions, then you’re pretty much stuck where you’re at, or anyway, it’s going to take a lot of work (the “overhead” I referenced in my last post) to move–sometimes enough such as to make moving from your present bad circumstances seem like a bad move. I maintain** that the presence of this “overhead” cost brings many people to decide they should remain under employment conditions they don’t find acceptable abstracting from considerations of “overhead.” And if someone is in such a position, then their job situation is both one they can reasonably think they should stay in, while at the same time being explicitly to their disadvantage, and to their employer’s advantage.
-FrL
*With the exception of the one about collective bargaining: In my post I was abstracting away from collective bargaining and just talking about individual workers and individual employers. I assumed, perhaps wrongly, that the person I was responding to would think of collective bargaining as an interference with market forces, rather than an expression of them.
**Though I have no cites for this. It seems like a fair assumption. Stats to the contrary would be welcome.
I said he had two options if he wanted to leave his job. One was to shop around for a better job in his same field, the other was to find a new field.
Short of silly options such as counting on winning the lottery or robbing a bank, these are, in fact, his only options. Nothing about my post that you chose to act snide about said anything about bargaining power.
You’re putting words in my mouth. I don’t think that we disagree. I didn’t say that his three options (stay put, change jobs, change fields) were all equally attractive, just that those ARE his only options.
Yep, upon review, it looks like I totally misread your intention in your post.
Please redirect the previously mentioned snideness toward the imaginary version of *Fiveyearlurker who exists only in my head. The real *Fiveyearlurker was not, it turns out, the intended target.
-FrL-
That’s funny, I made the same *mistake twice. The third time was on purpose, though.
-FrL-