This post originated from an RSS feed registered with Java Buzz
by Elliotte Rusty Harold.
Original Post: The Myth of the Rational Consumer
Feed Title: Mokka mit Schlag
Feed URL: http://www.elharo.com/blog/feed/atom/?
Feed Description: Ranting and Raving
At the heart of modern economics, even apparently contrarian economics such as Freakonomics, is the idea the consumer is rational; that the consumer can be relied on to act in their own best interests. If that’s not true, much of economic theory comes tumbling down. In fact, economists are so incredibly convinced of this dictate that when they observe apparently irrational behavior, they expend volumes attempting to justify and rationalize it, and prove that consumers are indeed acting in their own best interests. Indeed, that’s what Freakonomics is largely about.
The fact is people often aren’t rational. While we sometimes are, we often act directly counter to our own interests for no good reason. We have sensory and reasoning apparatuses evolved to help us find food in the jungle and avoid being eaten by tigers. Our reasoning abilities, as impressive as they are, can be actively counterproductive when applied to the complex, food-plentiful, tiger-free environment we live in today. Bruce Schneier explains this very well in his recent article on Rare Risk and Overreactions. Here’s one relevant portion:
The Virginia Tech massacre is precisely the sort of event we humans tend to overreact to. Our brains aren’t very good at probability and risk analysis, especially when it comes to rare occurrences. We tend to exaggerate spectacular, strange and rare events, and downplay ordinary, familiar and common ones. There’s a lot of research in the psychological community about how the brain responds to risk — some of it I have already written about — but the gist is this: Our brains are much better at processing the simple risks we’ve had to deal with throughout most of our species’ existence, and much poorer at evaluating the complex risks society forces us to face today.
Novelty plus dread equals overreaction.
We can see the effects of this all the time. We fear being murdered, kidnapped, raped and assaulted by strangers, when it’s far more likely that the perpetrator of such offenses is a relative or a friend. We worry about airplane crashes and rampaging shooters instead of automobile crashes and domestic violence — both far more common.
In the United States, dogs, snakes, bees and pigs each kill more people per year than sharks. In fact, dogs kill more humans than any animal except for other humans. Sharks are more dangerous than dogs, yes, but we’re far more likely to encounter dogs than sharks.
Our greatest recent overreaction to a rare event was our response to the terrorist attacks of 9/11. I remember then-Attorney General John Ashcroft giving a speech in Minnesota — where I live — in 2003, and claiming that the fact there were no new terrorist attacks since 9/11 was proof that his policies were working. I thought: “There were no terrorist attacks in the two years preceding 9/11, and you didn’t have any policies. What does that prove?”
What it proves is that terrorist attacks are very rare, and maybe our reaction wasn’t worth the enormous expense, loss of liberty, attacks on our Constitution and damage to our credibility on the world stage. Still, overreacting was the natural thing for us to do. Yes, it’s security theater, but it makes us feel safer.
People tend to base risk analysis more on personal story than on data, despite the old joke that “the plural of anecdote is not data.” If a friend gets mugged in a foreign country, that story is more likely to affect how safe you feel traveling to that country than abstract crime statistics.
We give storytellers we have a relationship with more credibility than strangers, and stories that are close to us more weight than stories from foreign lands. In other words, proximity of relationship affects our risk assessment. And who is everyone’s major storyteller these days? Television. (Nassim Nicholas Taleb’s great book, “The Black Swan: The Impact of the Highly Improbable,” discusses this.)
But really you should read the whole thing. Schneier is one of the most genuinely rational people writing about security, so of course he’s roundly ignored outside a small coterie of tech geeks.
I think the field of security and risk analysis is one in which it can be demonstrated empirically that people are not fully rational, and indeed that they behave irrationally in major, important ways. This is not just about politicians either. These irrationalities affect many small, individual decisions about whether to drive or fly, where to spend one’s vacations, and what products to spend one’s limited income on.
I’m curious how economists address this problem, and whether any of this makes them rethink their cherished belief that consumers are in fact rational. Can they rationalize people’s behavior with respect to improbable but mind-grabbing events? I suspect they can indeed do it, but I suspect this can be achieved only by twisting the idea of self-interest and rationality beyond any recognition. In particular, the only possible way out of this conundrum is to define security self-interest in terms of feeling safe rather than in terms of being safe; and that is a redefinition that is too irrational for me to accept.
Previous Topic
