Andrew Gelman recently wondered how so many economists can hold two seemingly contradictory beliefs:
1. People are rational and respond to incentives. Behavior that looks irrational is actually completely rational once you think like an economist.
2. People are irrational and they need economists, with their open minds, to show them how to be rational and efficient.
This, he suggests, raises a puzzle:
“How is it that economics-writers such as Levitt are so comfortable flipping back and forth between argument 1 (people are rational) and argument 2 (economists are rational, most people are not)?”
He provides several examples. First, he quotes Steven Levitt, who argues that people are irrational and “closed-minded” with respect to repugnant ideas, whereas economists are not. But why is this irrationality rather than disagreement he asks?
Another example is Emily Oster, who argues:
“anthropologists, sociologists, and public-health officials . . . believe that cultural differences–differences in how entire groups of people think and act–account for broader social and regional trends. AIDS became a disaster in Africa, the thinking goes, because Africans didn’t know how to deal with it.
Economists like me [Oster] don’t trust that argument. We assume everyone is fundamentally alike; we believe circumstances, not culture, drive people’s decisions, including decisions about sex and disease”
How is it that economists both “assume everyone is fundamentally alike” but also have different beliefs about how people think and act than “anthropologists, sociologists, and public health officials”? That is, how can every be fundamentally alike (rational) if economists have different beliefs than everyone else, and are therefore fundamentally not like everyone else?
Gelman thinks the answer is economists like to associate themselves with rationality, because rational is “good”, or what economists might call high status. They do this by celebrating the rationality of people and by patting economists on the back for their rationality. He says “both are ways of associating oneself with rationality. It’s almost like the important thing is to be in the same room with rationality; it hardly matters whether you yourself are the exemplar of rationality, or whether you’re celebrating the rationality of others”.
I think there’s certainly something to this. But I think a better explanation for some of what Gelman is puzzling over can be found in Bryan Caplan’s Myth of the Rational Voter. Here Bryan agrees with Gelman that rationality is overassumed by many academics. His explanation, however, is that people are rationally irrational. But what does that mean?
Like most economists, Bryan defends the notion that people are rational a lot of the time. But the reason is not some inherent rationality, but because being irrational costs them. So when we are talking about why movie theaters charge so much for candy (one of Gelman’s examples) it’s likely they are being rational because irrational pricing would cost them money.
But when people have no cost to irrationality they may embrace it because they have preferences over beliefs. For instance, when we’re talking about what someone believes about repugnant ideas, they don’t have any monetary incentive to have rational beliefs, and so they don’t.
Bryan argues that the systematic difference between economist and non-economist beliefs comes from four fundamental biases: anti-foreign bias, make-work bias, pessimistic bias, and anti-market bias. (I think you could add an anti-repugnant bias in there as well and explain the Levitt quote that Gelman puzzles over.) So when people don’t have costs to believing irrationally they satisfy their preferences over beliefs, and this leads them to have beliefs that conform to these biases.
Satisfying ones preferences for irrational beliefs when there is no cost to doing so is of course rational, thus giving us rational irrationality.
Economists believe themselves to be more rational when it comes to economic topics because they have incentives to think rationally in the area where they are experts. When it comes to toxicology, in contrast, it is toxocologists who will be rational. But as Gelman has argued before, economics is an imperialistic science, and economists are likely to believe themselves as being experts in just about any subject areas where incentives matter. But how does that explain the different beliefs of, say, economists and the sociologists, anthropologists, and public health officials in the Emily Oster example above? Aren’t they all experts of a sort when it comes to “broader social and regional trend”?
Well the disagreement surely comes from the fact that all three fields tend to operate with different frameworks and ways of looking at things, but quite honestly I don’t know how to account for different frameworks of overlapping experts in the rationally irrational model of belief. Nor can I explain why economists have less biased and more rational beliefs.