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Rationality and Deliberation in Economics
Vinod Anand | 10 Aug 2013

Rationality and Deliberation in Economics (Vinod Anand) Rational Economic Man calculates costs and benefits in the attempt to maximize his utility, under constraints. But given the nature of this calculative process he is in fact not able to choose. His free will is reduced to the mere following of an algorithm. There is a unique outcome dictated by the shape of his preference function and the position of the budget restriction. Rationality comes down to the calculation of a determinate outcome, with no acknowledgement of human will. Besides, Rational Economic Man is unable to perceive risks, let alone uncertainty, living as he is often supposed to do in a dream world of perfect information and certainty. When imperfect information is acknowledged the problem is, generally solved with the aid of the additional assumption of rational expectations, which assumes probabilistic risks rather than uncertainty as expounded by Frank Knight. Otherwise, Rational Economic Man is confronted in his models with multiple equilibria among which he finds himself unable to choose. In short, he is unable to cope with the contingencies of real economic life that cannot be resolved through constrained maximization. Where then does choice come in? And how do economic actors choose between different commitments with intrinsic value that cannot be traded off against one another? How is choice possible if there is no single scale to measure the costs and benefits of each alternative, as is assumed in a utility function? The brain damage patient who kept adding arguments in favour of and against two dates for an appointment neatly followed the algorithm. His problem was, however, that at each stage the information appeared imperfect. He did not feel the impropriety and futility of the extraordinary time use of his decision making process. At each stage he came up with new possible slates of affairs as inputs for the algorithm, not put off by any inconvenient emotion. Ever more information was available. Endless reasons could be found to choose the early date, but an equal number could be produced in favour of the alternative. He stuck to the calculations, unable to make a choice for one or the other option. Making a choice demands deliberation, an expression of will power and drawing on context with a due sense of appropriateness, but the patient was not able to make such a choice. When Elliot participated in a gambling game experiment he followed in each game the high-risk strategy of decks A and B and lost money. When he was asked about his strategy after the game he told the organizers of the experiment that he was risk averse. The other players, recognizing the uselessness of looking for an algorithm, followed their intuition and made responsible choices. They may not have fully maximized utility but they were clearly better off than Elliot. In terms of non-monetary utility also, Elliot did worse than the control group. Non- monetary utilitarian gains would lie in a psychological satisfaction derived from risk-taking. The monetary costs of losing the game might be compensated by the psychological satisfaction of playing a high-risk game: the kind of utility sought by real gamblers. But there was no such rationale behind Elliot’s gambling performance. He did not experience high-risk utility since he had expressed his dislike of risk: he described himself as a ‘conservative, low-risk person’. So, both in terms of monetary reward and of non-monetary utility (the fun of playing a risky game), Elliot’s behaviour in the gambling experiment was significantly less rational than the behaviour of the control group in which participants relied on their intuition and made judgments relating to the contextual knowledge that they gradually developed on decks A, B, C and D during the game. Elliot was irresponsible to himself and unhappy with the outcomes of his strategy. His strategy did not seem to comply with a ‘revealed preference’. In real life, humans are mentally incapable of doing the calculations that the neoclassical rationality assumption requires, and they have only imperfect information to inform their calculations (Herbert Simon 1982, 1983). Economic actors cannot possibly calculate the algorithm assumed by standard economic rationality. They satisfy rather than maximize, ‘reconciling alternative points of view and different weightings of values’. Here, Simon seems to refer to the commitment people have to their goals, commitments that are differently valuable. ‘The underlying assumption is that if these procedures are followed, then, in some long-run sense, the decisions reached will be tolerable or even desirable’. Simon assumes that the problem is only one of bounded rationality, in which rules can do the job that utilitarian calculation cannot. The problem is, however, that rules may help but they do not always apply. And often rules are not available, since the weighing of values requires not principles but judgments The ends that economic actors value are diverse; each matters in its own right and cannot be selected according to a set of behavioural rules, though rules may help in deliberation. Nor can the ends be selected on utilitarian grounds since they have intrinsic value and derive from a mixture of motives. Each commitment of the various actors is valuable in its own right and therefore, taken together, they are incommensurable. There is no trade-off between different commitments since there is no single scale along which the different ends can be measured. Nevertheless, economic actors have to make choices, real choices in a world of uncertainty. They choose with help from the particular context in which they interact. They are guided by shared and contested values, without the certainty of moral rules. They follow their commitments, knowing the conflicts implied among different intrinsic values. Hence, they cannot and do not calculate but deliberate, using a mix of interpretation, reflection, tacit knowledge, rules of thumb and free will. Such deliberation is a careful process of intuitive reasoning rather than calculation, involving emotion rather than an algorithm, and evaluating pluralist commitments within changing contexts rather than following utility maximisation.’4 What counts are the valuations that constitute people’s very being, their ‘self’. Hence, deliberation expresses our selves, our identity, through the ends we pursue and upon which we act (Hollis 1987). Finally, one more deficiency in Rational Economic Man needs to be addressed: he needs to interact with other actors in the economic process.