Whenever someone is busy attempting to have a heart-to-heart with me, I have one catch all statement I always pull out:

Hold yourself to a high standard that you can feel proud of, but never base your expectations or judgments of others on that standard

The usual resp0nse to this is “that’s f’ing obvious”, “no shit, do you think you’re adding anything”, and “congratulations you’ve made the obvious sound pretentious”.

Now this is fine, I agree that the point is obvious and not particularly exciting.  But at the same time this is one of the key reasons why economic theory builds up from basic rational expectations – and yet many of the same people that would call my advice overtly simply when looking at their daily life, would turn around and imply that this sort of assumption is inappropriate when trying to understand the tendencies in the world around us.

What are you saying?

When we assume people act “rationally”, we are assuming that individuals make choices based on the costs and benefits put in front of them.  As an individual I know I make choices, and those choices are on the back of my implied view on the costs and benefits of my actions, so using this view of the individual makes sense to me as a firm prior.

Now, when I look within myself I can see issues with my choices – but given that they are my choices I also know that I have the ability to change them.  Furthermore, my ability to recognise my own faults and poor choices, and still not change my choices, seems to imply that the cost of making “better choices” is seen as too high in my own eyes.  As a result, the policy I enforce often just lets me make my own choices.

In this context, when we look at other individuals we should be LESS judgmental of their choices.  We cannot observe the costs and benefits they face, we cannot determine their inner monologue for justifying and discussing choice, we have only a biased external view of how they think and feel.  Presuming that we can tell them what their choices should be is the height of arrogance, a belief in the supreme superiority of us above them – and assuming the direct irrationality (that they do not make choices based on costs and benefits) of people in this context just has no basis.

This is not to say that we can’t identify areas where individuals have biases, or may want help with choices.  We can look inside ourselves and observe present biases, addictions, and areas where we are short on information – however, this is no irrationality, but merely constraints to our own decision making.  Providing institutions that help individuals move past these biases is the right sort of solution – rather than prescribing choice.

Conclusion

Irrationality is the rally call of people who have a policy they want to put in place, and they need to find “a reason” to do it.  Everyone thinks that people around them are irrational, but a mere moment of introversion suggests that we are too quick to judge the actions of others – given our inability to look through their eyes, or feel the desires that drive their action.

Economic theory is based off the idea that individuals have the best understanding of their own minds, and that policy must be based off a clear market/institutional failure.

Calling for policy based on irrationality just plays on our prejudice against other people based on their “intelligence”, a perception that relies on poor information  is biased by our own desire to make ourselves feel more important in our own lives.