Rationality in Markets Is Cognitively Unnatural

The label ?rational? is becoming illogical. Economists, even the better behavioral kind, use it particularly badly. That great scholar of human nature, Shakespeare, knew better. We evolved to be relationally rational. We productively resist certain transactional gains.

Consider the Ultimatum Game, which has a Proposer and a Responder. The Proposer is given some money and must offer the Responder a share. If the offer is accepted, each gets the relevant amount, but if it?s rejected, neither gets any. Economists predict ?rational? acceptance of any offer, however low, since the Responder will benefit. But that?s not what happens. Below some level, which varies by culture, offers are rejected, ?irrationally.?

Are there good reasons to reject gains in such situations? The impulse to incur costs (the forgone share) to punish those we feel treat us ?unfairly? (by prevailing norms) can be very rational. Daniel Kahneman calls such feelings ?fast thinking,? cognitive patterns that have worked well for so long that they?ve become instincts. These social instincts, if well configured culturally, can be rationally adaptive.

Rational, too, often means individualistic market-style thinking and modeling life as a stream of transactions with interchangeable others. But that?s a poor description of human life. Indeed that sort of individualism was invented only about 15 generations ago. And most cultures are still sociocentric.

Since before we were human, the logic of our survival has been social and relational. It was maladaptive to ignore the impact of our actions on others, or how they were seen, or their long-term effects. This equipped us with a relational rationality that included not just self-only and not only short-term factors.

Prioritizing fairness and reputation?both needed for the cooperation we depend on? over immediate gain, has likely been key to our survival for 10,000 generations. It still is. Definitions of self-interested rationality that exclude this truth, risk becoming self-undermining. Isn?t that truly irrational? Human self-interest has always had social constraints. Reputations, such as an exploiter or being exploitable, matter. As Othello says ?Who steals my purse steals trash; ?tis?nothing?But he that filches from me my good name?makes me poor indeed?

Behavioral economics hasn?t cured this; it?s still too transactional. Cognitive biases contain a bias towards classical economics. They have two sources of potential error, the observed behavior and the supposedly rational ideal it deviates from. Using classical economics ideals, inherits their ?cognitively unnatural? features.

Essentially all our key traits, including our rationality, evolved relationally. Until late in the rise of cities it couldn?t have been otherwise. Highly individualistic and transactional thinking often leads to poor results, for example in Prisoner?s Dilemmas. It can?t continue to be deemed rational to damage what we depend on.

Illustration by Julia Suits, The New Yorker Cartoonist & author of The Extraordinary Catalog of Peculiar Inventions.

Previously in this series:

Kahneman and Bentham?s Bucket of Happiness
Kahneman?s Clarity: Using Mysterious Coinage in Science
What Rational Really Means
The Cognitive Science of Star Trek
Colonoscopies Clarify Inner Workings of Minds
Happiness Should Be A Verb
Better Behaved Behavioral Models

Source: http://www.scientificamerican.com/blog/post.cfm?id=rationality-in-markets-is-cognitively-unnatural

macys jcpenney toys r us toys r us kohls target target