By Rohan Jain
This argument is dependent on how you define the terms rational and irrational. In terms of behavioral economics, rational can be defined as maximizing your utility logically in one area, while irrational can be defined as doing just the opposite. With this terminology, if you are judging someone based on what they are doing to maximize their utility, they should be judged as rational because they are being logical in terms of satisfying their personal preference. However, if you are judging someone on their process of executing their utility, even if it may seem tempting, you should not look at their system of getting there as irrational based on efficiency and logic used.
In Naked Economics, Charles Wheelan talked about his initial reaction to reading an article in the New York Times about South American villagers cutting down virgin rainforests and destroying rare ecosystems. He initially knocked over his Starbucks latte in what he called, “surprise and disgust.” He then started to rethink his position on the topic as he put himself in the villagers shoes. He imagined a life where his kids were starving and are at risk of dying from malaria, and thought about the tempting incentives that would come with chopping down these rainforests (allowing him to feed his family and buy a mosquito net). These seemingly irrational behaviors are not as unreasonable as Wheelan thought initially, after all.
Let’s say that we were to depict someone as irrational because instead of studying for a test, they were watching TV all night. When depicting someone as irrational, we have to take into account the fact that the decision is rational in the very moment the person is satisfying their short term utility. Even if it has a detrimental effect on their long term utility (doing well on their test), which entails consequences that seem to have been made by irrational actions, the initial decision is in fact rational. This whole thing can be seen as irrational, when really it was an effect of a rational action that was put in place fulfill one's short-term utility.
In a chapter entitled “Unbelievable Stories about Apathy and Altruism” from Stephen Dubner and Steven Levitt’s Superfreakonomics, there was a very interesting game study performed that provided insights into this conflict. Ultimatum was a 1980’s lab game that gave one contestant $20, and asked him/her to split the money in any way he/she wants with an anonymous co-contestant. If they decide not to split it, or if the other contestant rejects the money, they both walk away with nothing. This games results proved that most people were unselfish, given that the average amount given away was about $6. Later, a variant of this game was performed where instead of choosing how much of the $20 to give away, you had two options. Either to split it down the middle, or give your co-contestant $2. Again, people were unselfish, as 3 of every 4 participants did split down the middle. This game shows altruism at its finest, and how the common people are very similar in their decision making process. This phenomenon raises an important question -- if the decision to split the money is thought of as irrational, does the fact that most people still do it make the decision behaviorally rational?
In conclusion, the underlying theme is that we are all optimizing individuals making decisions to maximize our personal utilities. Whether perceived as rational or irrational by the public, the decisions made are internally rational to the person. After evaluating their choices, circumstances, and risks, decisions can be made accordingly based on imminent or long-term utility. It’s hard to counter the theory of behavioral economics because it covers such a wide range of topics. The media, marketers, and salesman can sometimes overcast rational decisions, and turn them into irrational decisions by changing the way we think. Now we must think about how critics of classical microeconomics affect our lives, and how we can get around them. If the only irrational people are the ones misperceived, then who is actually irrational?