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Wednesday, September 22, 2021

Rationality

If you’re a repeat reader of my columns, I think a thought has probably crossed your mind at some point or another: “Isn’t everything that this guy is writing about basically common sense?” I say things like: balance your money between saving up for a rainy day and splurging just to have a little fun once in a while, or eat in when it’s convenient and eat out with friends. It’s all so very basic and rational, especially from an economics standpoint.

But rarely do people ever behave rationally. At least from an economist’s point of view.

To give an example, take a pregnant woman who smokes cigarettes. To any normal person that thinks rationally in the conventional sense, what this woman is doing is completely irrational, no matter the circumstance. The smoking is not only harmful to her, but will also be detrimental to her unborn child as well. But from an economics standpoint, her behavior can possibly be seen as rational. As long as she is deriving the maximum utility at her desired price, then she is behaving rationally.

Economists define rationality (to put it simply) as doing whatever it takes to receive the most utility out of something. As I mentioned in a previous column, utility is just a measure of happiness. As in, people will do what makes them happiest/benefits them the most. Again, it seems like it would just be common sense, but all disciplines have to be built on a basic foundation, right?

But people never behave as rationally as economists believe. Thus, the models that are always made in textbooks always considerably downsize the scope of the world and narrow everything down into a very minimalistic and simplistic model. For example, a typical microcosm presented in economics would be a world in which there were only two stores that sold the same good and consumers were indifferent between both stores.

From there you can draw your demand curves, your supply curves, find your equilibrium point, etc. But only because it’s such a pared-down version of what the real world is like. There aren’t variables in economics that account for things like altruism or malice or jealousy.

Here’s another example of how something should go if people behaved rationally: Suppose that there are two people that have 100 $1 bills to split between each other. The caveat is that only one person gets to choose how it gets split, and if the other person disagrees with the split, then they both end up not getting anything. The way the scenario should play out, if all players were behaving rationally, is that the first person would allot $99 to himself and $1 to the other. The other would accept because the $1 would exceed the $0 he would have gotten had he declined.

But if you play this situation out with actual people, the results will almost never be that way. There will be cases where the people will split it squarely down the middle, or there will be cases where the deciding person will get a slightly bigger cut, but the other person will still make out with a decent amount. Or there will even be cases where the splitter will behave rationally and choose the appropriate split of $99 to one, but the other person will spite him/her and they will both end up with nothing.

I try to act rationally in my day-to-day life, but it’s difficult to adhere to at times. People are truly fascinating beings and our actions and behavior can’t really be mapped out on data charts and graphs.

With that said, take into consideration a little bit of what I just said. Think to yourself: “Am I behaving as rationally as I could?” as you’re on the precipice of downing that eighth gin and tonic. Will the ensuing hangover (and thus loss of utility) tomorrow be worth the utilities you’re gaining right now?

Actually, don’t think that way. It’s really dorky and lame and I don’t even think in terms of utility. But it is a somewhat interesting concept. I don’t know. I’m not behaving rationally right now as I’d rather play Halo than write up this column. But sometimes you’ve just got to behave irrationally and complete the things that you’re responsible for.

ANDREW POH suggests you sit in on a Game Theory lecture if you found what he talked about interesting. If you’d like to talk more about rationality, email him at apoh@ucdavis.edu.

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