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Irrational preferences

Summary:
In mainstream economics — especially in microeconomics, social choice and game theory — it is taken for granted (by definition) that the actors appearing in the model world, are rational and try to satisfy given preferences. But, confronting the axiomatic model world with the real world, it usually turns out that quite a few actors​ are irrational. In a classic experiment conducted by Barbara McNeil and colleagues, it was investigated how variations in the way information was presented to patients influenced their choices between alternative therapies. Individuals — randomly assigned — were asked to imagine that they had lung cancer and to choose between two different therapies: Different groups of respondents received input data that differed only in whether or not the

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Irrational preferencesIn mainstream economics — especially in microeconomics, social choice and game theory — it is taken for granted (by definition) that the actors appearing in the model world, are rational and try to satisfy given preferences. But, confronting the axiomatic model world with the real world, it usually turns out that quite a few actors​ are irrational.

In a classic experiment conducted by Barbara McNeil and colleagues, it was investigated how variations in the way information was presented to patients influenced their choices between alternative therapies. Individuals — randomly assigned — were asked to imagine that they had lung cancer and to choose between two different therapies:

Different groups of respondents received input data that differed only in whether or not the treatments were identified and whether the outcomes were framed in terms of the probability of living or the probability of dying.

The experiment demonstrated that by only changing the ​emphasis from surviving (x) to dying (1-x) in the description of the treatment alternatives, there was a significant change in population preferences. According to ‘rational choice’ theory, the way you ‘frame’ alternatives should be totally inconsequential. Rational people do not change preferences for inconsequential reasons.

So what do we learn from this kind​ of experiments? This: In mainstream ‘as if’ model worlds there are only rational people and in real-life there are a lot of ‘irrational’ people.

Things are obviously not as postulated in mainstream microeconomics. The final court of appeal for models is the real world. As long as no convincing justification is put forward for how the inferential bridging is made from the model world to the real world, ‘rational choice’ models have to be considered little more than hand-waving.

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Lars Pålsson Syll
Professor at Malmö University. Primary research interest - the philosophy, history and methodology of economics.

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