the rational observer

Economics is an imperfect science. While it attempts to employ the same rigors as the “hard sciences” like Physics, it is flawed on the most basic level; it relies preeminently on the behavior of individuals who rarely fit the rational model that we impose. Physics says that every tangible thing is made of atoms, which in turn have protons and neutrons that are made of quarks, tiny particles whose behavior we don’t understand. However, physicists can observe quarks and have built models that can adequately predict what they will do. There is no need to disregard these models because physicists can’t explain why a particle behaves a certain way. The importance is that they can predict that they do behave a certain way. While not a perfect analogy, the same could be true for economics, but the error lies in the logic of this argument. Unlike a quark, a person’s past behavior only sometimes predicts future behavior. People are unpredictably unpredictable so we say they act irrationally.

The other potential is that the models we have created are not robust enough to predict accurately. It would never suffice in our Physics example to write something off because it does not behave the way we would expect. In fact, the opposite is always the case. To make another analogy, in economics we are only seeing to the molecular level and trying to explain string theory.

Enter: Behavioral Economics; an awareness of sociology and psychology in the approach of economic analysis. The paramount idea is that people respond to incentives. Yet, economists are still quick to say that some behavior is irrational if it does not fit their expectation. A better question is: under what circumstance is this behavior rational?

A classic example is Charlie Brown’s insatiable need to kick the football when Lucy offers, despite the knowledge that she will inevitably pull away at the last second resulting in physical anguish. A casual observer might conclude that his behavior is predictable, seeing as he makes the same mistake over and over, but not rational. The rational observer would contend that Charlie Brown is not irrational, but that there are factors unseen or misunderstood to account for. For instance, perhaps Charlie Brown is lonely, and the brief and ultimately sadistic interaction that they share is important. Not a far stretch. It is also possible that Charlie Brown wouldn’t even want to kick the ball given the chance due to a severe athletic inadequacy that would undoubtedly lead to more severe ridicule. Charlie Brown can insure that his abilities are never tested by sticking to this implicit agreement.

Although this example is a little ridiculous and obviously contrived, it does a good job explaining behavior that could otherwise be deemed irrational, and with only two fairly digestible assumptions. Using this framework I will attempt to explain seemingly irrational behavior through rational means. The stuff that gets you to do a double-take while you’re going about the business of ordinary life. Perhaps afterwards we can better understand, and be less frustrated by, those who perturb the nature of rationality.