I like the statement at the end, which is red and bold. It reminds me of one of the ways I have defined rationality. in my class on the first day. That we try to achieve our objectives by the lowest cost possible, based on the information that we have.
I tell my students that we are not all Einsteins, that we make mistakes. But we do not knowingly make ourselves worse off. But again, we may not have enough information at the time of a decision to make the optimal choice. We might by a TV at Wal-Mart but find out the next day it was cheaper at Best Buy. That does not mean we were irrational.
"Specifically, what may seem like a good bet on average for a group of people may be a disaster for a particular individual over time. Therefore, what is determined to be 'irrational' from a traditional economic perspective, may instead be a completely rational choice for an individual who is considering what is best for their own self-interest over time.
To illustrate this idea further, Peters offers the example of a simple gamble, "toss a coin, and for heads you win 50% of your current wealth, for tails you lose 40%." Viewed only from the traditional economic perspective (of expected utility), taking the gamble seems like a good idea. Specifically, from that perspective, if we were to bet $100, we would expect to win $5 back on average (0.5 x $50 + 0.4 x -$40 = $5). Nevertheless, as behavioral and data scientist Jason Collins explains in his blog post on the topic, this gamble may not be such a good deal from the individual perspective, especially over time. As Collins explains:
" One way to think about what is happening is to consider the four possible outcomes over the first two periods [of the gamble]. The first person gets two heads. They finish with $225. The second and third person get a heads and a tails (in different orders), and finish with $90. The fourth person [gets two tails and] ends up with $36. The average across the four is $110.25, reflecting the compound 5% growth. That’s our positive picture. But three of the four lost money.""
"we all think differently when we are making risky and uncertain choices (which are often outside the scope of traditional economic models). Put simply, the economic perspective of expected utility works best when individuals are fully informed and outcomes are certain, allowing them to see the 'big picture' view. When information is scarce, however, they maximize their own outcomes over time instead, by adopting other perspectives (called Heuristics) and doing the best they can within the uncertain and risky situation. Given that, when making your own decisions, it is helpful to be mindful of how deeply and thoroughly you are thinking about the information and risks at hand."
"traditional economic models may fall short under conditions of uncertainty and risk—points previously noted by behavioral economists too. Nevertheless, outside of those conditions, the theories and models of economics are still valuable tools for understanding decision-making as well. So, Peters' (2019) work certainly adds to and supplements economic and behavioral economic models (especially by expanding the notion of what we consider 'rational' decision-making), but it does not invalidate or nullify those other perspectives."
"Humans are not 'irrational' creatures. Rather, we are simply striving to do the best we can, with whatever limited perspectives we have in the moment—and just need more education, information, and support to make better decisions over time."
No comments:
Post a Comment