Optimally Irrational

Lionel Page

My review 2023-12-18

The idea of the rational actor in economics has often been ridiculed and criticized as a derogatory view of what humans are like: selfish, cold-hearted calculators, basically psychopaths. And the critics have often insinuated that this analysis has been normatively loaded; humans as perfect cogs in the machinery of capitalism. The accusation is that this is how economics wants people to behave. Lionel Page does not use this line of attack in his book. Rather, given the various empirically determined biases, he asks: if the actual behavior of humans is often significantly different from that predicted by the rational-actor model, then why is it so? Instead of scrapping the idea of the rational actor, he uses it as a starting point to figure out what the mechanisms are that cause these departures.

This is, in my mind, the best way to deal with the issue. Beginning with a baseline of rationality, defined in some way, the investigation in why it is not adhered to in particular cases might give us interesting insights into what is going on. Is the particular model of rationality mistaken or limited in some way? Are some unaccounted-for mechanisms active? Do we need to consider other factors? If so, what are they? So, instead of just tossing out the idea of the rational actor, an analysis of exactly how and why it fails may give us vital information.

The framework of economics since at least the beginning of the twentieth century has been based on the idea of the rational actor. This is an idealized person who acts selfishly with clear goals and does so according to logical reasoning about preferences and how to satisfy them according to the situation. But in the last 30 or so years, the focus has increasingly been aimed at the fact that we humans systematically deviate in many ways from this idealized actor. There have been many studies in economy, psychology, behavioral science and related fields that find different kinds of biases in how humans act and think various situations.

Lionel Page's aim in this book is to apply an overarching framework of evolutionary thinking to explain the many disparate results. His argument is that many of the seemingly biased or flawed human behaviors are actually perfectly reasonable adaptive solutions to practical problems. Hence the title of the book: Optimally irrational. Page initially makes a very simple point: if we humans are stupid, irrational and generally inept, as some have interpreted the results of behavioral studies, then how come we are still around? Should not evolution have disposed of humans if they were so badly flawed?

Page summarizes a huge amount of scientific results and presents it in a very accessible manner. His descriptions and arguments are clear and concise. In general, I find them persuasive and thought-provoking. For instance, in choosing between several different options, we almost never have complete information, and obtaining complete information would be prohibitively expensive. So if we want to make a choice, we will have to decide when to make the choice given the remaining uncertainties. That is why rules-of-thumb and gut feeling are required. They are effort-saving devices, that usually produce results that are good enough. But in certain situations they fail. We do not have to feel like lesser human beings for choosing among alternatives just based on a feeling.

Another example is the fact that the absolute level of some good (health, income, etc) does not seem to determine how satisfied we are with the current state of affairs. Rather, it is the comparison of our level to some reference point that matters. Why? Page presents several different possible explanations which are all very interesting.

Page ends his book with a very interesting discussion on the history of the idea of rationality in economics, and how it relates to the place of psychology in that science. For example, one criterion of rationality of choice is called the axiom of the independence of irrelevant alternatives. Given a specific set of alternatives, the preferred choice among those should not be affected by the addition of another irrelevant alternative. But this is often violated. Page cites a scenario invented by the philosopher and economist Amartya Sen: Jane has the choice of going home to John for a drink, or to decline the invitation. She is tempted to go. But then John adds that he can also offer Jane some cocaine. Now, if Jane does not want to take any cocaine, it ought to be rational for her to accept the invitation for a drink and just say no to the cocaine. The availability of cocaine is an irrelevant alternative. But in fact, we would not be surprised if she decides that she no longer wants to go for a drink at John's. The irrelevant alternative has affected her choice.

Page ends his book with advice to his fellow economists: They need to try to figure out why people do things as they do, empirically, and enrich their models of behavior to reflect the evolutionary origins of human preferences, and to take into account the constraints, uncertainties and social strategic dilemmas that are an inescapable part of human existence.