Irrational Economist_ Making Decisions in a Dangerous World - Erwann Michel-Kerjan [3]
ARE WE RATIONAL ACTORS OR RATIONAL FOOLS?
We sought the answer to these questions from a group of internationally recognized experts who had worked with or were influenced by the economist Howard Kunreuther, who pioneered the field of decision making and catastrophe management (see the Acknowledgments section). Their work in The Irrational Economist examines human decision making from a variety of perspectives and documents the rich and subtle complexities of the concept “rationality.” These contributors’ perspectives are the result of an important evolution in theory and applied research that has occurred during the past half-century and is now accelerating.
Many mainstream economists in the second part of the twentieth century developed sophisticated mathematical treatments that attempted to model human behavior. But most of these were founded on a very simplistic concept of rationality. Indeed, early views on rationality were dominated by the concept of homo economicus: The idea here is that we can all be represented by an economic man who is assumed to be completely informed, perfectly responsive to economic fluctuations, and rational in the sense of having stable-over-time , orderly preferences that maximize economic well-being and are independent of the actions and preferences of others.
Slowly, psychologists and other behavioral scientists began testing this presumption of rationality, which, as noted by Herbert Simon, one of the most influential social scientists of the twentieth century, permitted economists to make “strong predictions . . . about behavior without the painful necessity of observing people.”3
Simon, both an economist and a psychologist, drew upon empirical research on human cognitive limitations to challenge traditional assumptions about the motivation, omniscience, and computational capacities of “economic man.” He introduced the notion of “bounded rationality,” which asserts that cognitive limitations force people to construct simplified models of how the world works in order to cope with it. To predict behavior “we must understand the way in which this simplified model is constructed, and its construction will certainly be related to man’s psychological properties as a perceiving, thinking, and learning animal.”4
About the same time that Simon was documenting bounded rationality in the 1960s and 1970s, another psychologist, Ward Edwards, began testing economic theories through controlled laboratory experiments to examine how people process information central to “life’s gambles.” Early research confirmed that people often violate the assumptions of economic rationality and are guided in their choices by noneconomic motivations. For example, one series of studies showed that slight changes in the way choice options are described to people or in the way they are asked to indicate their preferences can result in markedly different responses. In short, we behave very differently depending on how the information is presented to us, on the nature of the decision-making environment, even on what period of life we are in. Moreover, in many important situations we do not really know what we prefer; we must construct our preferences “on the spot.”5
Not surprisingly, as often happens with new ideas, economists of the 1960s and 1970s were divided on how to interpret them. Many, rather than trying to understand the psychology, embarked on studies designed “to discredit the psychologists’ work as applied to economics.”6 Evidence against the rationality of individual behavior tended to be dismissed by those economists on the grounds that in the competitive world outside the laboratory, rational agents