Irrational means you don’t agree with me

The term “Rational” is used in economics to mean using the decision process that results in the best economic outcome.

And the best economic outcome is often defined as the one that results in the highest amount of money for the decision maker.  That at least is the theory.  There is an entire body of analysis under the title “Game Theory” that shows how such Rational Decision making would apply to many situations.

Herbert Simon actually showed a fundamental flaw in approaches like Game Theory and other forms of economic rationalism.

The flaw is that to really satisfy the rules of rationality, the decision maker would need to have infinite time to make the decision and would also need access to all knowledge, all of which must be reviewed to see if it pertains to the problem.

So Simon proposed that what was really meant by economists when they used the idea of rational decision making was something that he called “Bounded Rationality”.  The boundaries to rationality were necessary to get to a decision before tea time next spring.

Rational decision makers needed to apply heuristics to determine the actual amount of time and the pertinent information that would be needed for making any decision.  Heuristics are seen as the opposite of rationality.  They are the “gut feel” way to decide something.  So Simon showed that Rational Decision Makers must be using gut feel.

Just think if physicists considered anyone who did not solve physical problems using the best equations that physicists have to offer as “irrational”.  Everyone who drives a car, or catches a ball, would be found to be totally irrational, because those activities always rely upon heuristics, rather than physics equations.  Instead, physicists would readily admit that the person who can run across Center Field and arrive at just the right time to catch the baseball is actually properly applying physics, instead of the opposite.

And RISKVIEWS would extend Simon’s arguments to suggest that the heuristics used are not neutral to the decision.  “Rational” decision makers will all apply their own heuristics to decide what needs to go into a decision.  Some of those heuristics will be based not on a “rational” evaluation of the value of information not included or analysis not performed, but it will be biased to leave out the information and analysis that leads away from their preferred solution.

What Simon deduced is that there is no purely rational decision making process.

And RISKVIEWS is saying that anyone who proposes that their decision is made rationally should be suspect.  Are they using the term rational to persuade?  Or do they not even know about the limitations of their own analysis?

Good analysis should include information about the way that the analyst decided on the boundaries for that analysis.  Someone who simply states the assumptions underlying their analysis is not giving you a solution, they are giving you a puzzle to solve.  The solution to the puzzle is the knowledge of when the analysis may be true and when it may be untrue.  Solving that puzzle involves understanding the bounded rationality of the analyst and the degree to which reality may or may not be outside of those bounds.

Explore posts in the same categories: Decision Makng


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