Critics love behavioral economics because they think it gives traditional economics the comeuppance it deserves, and this is a mistake.
The degree to which Man is, can or ought to be rational has long been a favorite question of philosophers, psychologists, sociologists, economists and barflies alike. No one minimally acquainted with the infinite variety of human self-destruction, without at least one or two episodes of which almost no human life seems ever to be got through, can doubt that irrationality is, at the very least, quite common. Man may be the only rational animal, but only sometimes or intermittently.
Rational action can only be that which conduces, on some mixture of evidential and logical grounds, to a desired goal. But goals themselves are not rational, except in so far as they are subordinate in a hierarchy of goals and their fulfillment conduces to that of the highest goal of all, whatever it might be. But what cannot be rational cannot be irrational: so that desires, at least ultimate ones, are not irrational, they are arational.
Matters are somewhat complicated by the changing nature of human desires. Few of us are monomaniacs, devoting our lives systematically to the pursuit of a single goal. This is perhaps both fortunate and unfortunate: it is fortunate because monomaniacs tend to be bores, unless the object of their monomania is one that interests us (I once met a fascinating and delightful man whose monomania was the taxonomy of mosquitoes, a dry subject that he invested with all the romance of the Waverley novels). It is unfortunate in so far as great achievement is generally the result or consequence of monomania, though it must be remembered that it does not follow from the fact that great achievers are often monomaniacs that monomaniacs are often great achievers.
If it is true that the ultimate goals of most humans – that is to say those that seem most important to them – change from moment to moment, then it follows that what counts as rational conduct for them also changes from moment to moment. Only by fixing an ultimate goal or goals – for example, by religion, though there are other means to do so – can human conduct become even minimally rational in any consistent way. Perhaps one of the travails of the post-modern condition is that we, that is to say the human race, have increasing difficulty in fixing our goals from within, and none is imposed upon us from outside. Our whim is law.
While it is difficult for Man to be entirely rational even with respect to his avowed goals or desires, so I have always thought it was impossible for him to be entirely irrational also. I was surprised, therefore, to read an interview recently with Daniel Kahneman, who won the Nobel Prize for economics, a psychologist rather than a pure economist (if any economist can be said to be pure), and who argues in it that ‘People aren’t convinced by arguments.’ He also says ‘We’re all prone to make some very simple errors when we try to work out what to do. And we continue to make those mistakes even when they are pointed out to us.’ For this there is no remedy: ‘I don’t have a recipe for avoiding the errors that we’re all prone to, and I don’t think there is one. It’s the way we are.’
This reminds me a little of Marx’s famous dictum in The German Ideology that ‘it is not consciousness that determines being, but being that determines consciousness.’
There are two senses in which this can be taken, a weak and a strong. The weak sense is as a psychological or sociological generalization. To this we can readily give our assent. I think as I do largely because of the age in which I was born, and because of the kind of people with whom I have mixed – because I was myself born into class of person with whom I mixed. Most people, if they have a religious belief, are influenced more by their parental inheritance than by what Gibbon calls the ‘evident truth of the doctrine itself.’ Clearly Marx also believed that we have the economic ideas that we do because we occupy a certain position in the economic hierarchy and for reasons of economic self-interest: if I believe in capitalism it is because I am, or at least hope to become, an owner of the means of production, etc. etc.
As an empirical generalization this is rather uninteresting, however, since its truth is evident on the most minimal reflection. It is also unimportant if, in fact, there are occasions, as there seem to be many, on which it is not true.
The principle is intellectually interesting only when it is obviously wrong, when it is taken in the strong, epistemological sense: that human thought is necessarily and inevitably determined in this fashion. And if this is the case, one does not search for the truth or otherwise of what a person believes, but for the underlying economic or social interests that make him believe it. Taken as an epistemological principle, Marx’s dictum (as well as being obviously wrong) leads straight to the show trials and the Gulag.
Professor Kahneman’s views, at least as reported in the interview, are also capable of a strong and a weak interpretation. The weak interpretation seems to me true but uninteresting. The strong seems to me interesting but untrue. And it is another, perhaps lamentable, truth of human psychology – as an empirical generalization, not as an epistemological principle – that the interesting is preferred to the true. This is partly because we have a vague apprehension that, as I think Bertrand Russell once remarked, there is no guarantee that the truth, when found, will be interesting.
In the interview, Professor Kahneman gives as an example of our habitual and presumably ineradicable irrationality our faith in the fund managers to whom we entrust our savings. In fact, it has been shown over and over again (he says) that their performance is no better than random, and no better than we could do ourselves with a pin moved wandering ignorantly over the list of the companies on the New York stock exchange. And yet we continue to have faith in them.
Let us for the moment grant that this is true: does it necessarily make my decision to entrust my money to fund managers irrational? By no means. All that is necessary for it to be rational is that their performance should be no worse than mine if I decided to undertake the task myself, which ex hypothesi it cannot, on average, be. I pay the fund managers not to make me rich, but to save me the anxiety or bother of thinking about such matters, just as I pay my accountant to be an intermediary with the tax authorities. No doubt if I put my mind to it, I could fill in my tax form myself just as well as my accountant, and save the fee; I just don’t want to put my mind to it because I am not sufficiently interested in tax efficiency. I am fortunate enough to be, where money is concerned, a man moyen sensuel: I don’t want to be poor, but I don’t want to be rich either, at least not if it means having to master tax law.
Just as the role of rationality can easily be overestimated in human life, so can that of irrationality. Turned into an epistemological principle, the idea of irrationality falls foul of a kind of Cretan paradox. If all human beliefs are irrational, then there can be no rational grounds – at least for humans – for believing that they are. And so long as it is conceded that rationality is in principle possible, Man is faced with the task, like that of Sisyphus as it might be, of extending the realm of the rational: for it is the experience of ages that there is a distinction to be made between wisdom and foolishness, even if the latter, as a matter of empirical fact, tends to prevail.