Against Behavioural Economics and Irrationality

Prais­ing Maurice Allais as the fath­er of beha­vi­our­al eco­nom­ics rather than Kahne­man and Tver­sky,  John Kay intro­duces us to some of Allais’ ideas while sim­ul­tan­eously provid­ing one of the finest argu­ments against the simplist­ic view of beha­vi­our­al eco­nom­ics as the study of irra­tion­al­ity:

The skill of piecing togeth­er sense from frag­men­ted and inac­cur­ate inform­a­tion is a cent­ral attrib­ute of human intel­li­gence. Lit­er­al inter­pret­a­tion, and insens­it­iv­ity to con­text, are not marks of ration­al­ity but men­tal disorders. […]

The [beha­vi­our­al eco­nom­ics] exper­i­menter­’s trick is to con­struct an arti­fi­cial situ­ation in which nor­mally sens­ible beha­viour gives what he thinks is the wrong res­ult. The “mis­take” is detec­ted in a mean­ing­less prob­lem designed solely to eli­cit the “mis­take”. […]

Allais was less con­cerned to show that our beha­viour was irra­tion­al than to argue that the premises of ration­al­ity itself were irrational. […]

Allais’ most fam­ous exper­i­ment showed that we often treat very high prob­ab­il­it­ies very dif­fer­ently from cer­tain­ties, although “ration­al” indi­vidu­als would regard them as almost the same thing. But very high prob­ab­il­it­ies often are dif­fer­ent from cer­tain­ties: very high prob­ab­il­it­ies are usu­ally derived from cal­cu­la­tions whose rel­ev­ance and valid­ity are them­selves uncer­tain. […]

Irra­tion­al­ity lies not in fail­ing to con­form to some pre­con­ceived notion of how we should behave, but in per­sist­ing with a course of action that does not work. Some­times in mod­ern eco­nom­ics and polit­ic­al life, there is a big dif­fer­ence.

The example Kay uses is a bit glib but does serve its purpose.That last para­graph, how­ever, is the crux of it all. As you may have guessed, this is the Allais that designed the Allais para­dox – an exper­i­ment in beha­vi­our­al eco­nom­ics that shows the above won­der­fully.