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The Lively and Logical Logic of Life
Boredom drives a lot of academic research. After you've studied a subject for decades, it isn't much fun to keep repeating the standard lessons, so you mischievously start looking for counter-examples and loopholes. Unfortunately, when the mischievous academic talks to a broader audience, he often leaves the impression that the standard lessons are a waste of time. Frankly, I think that a lot of recent popular economics books fall into this trap.
Tim Harford's The Logic of Life is a welcome antidote. Harford argues that the standard economic assumption of human rationality usually works. In fact, it works in a lot of cases where you might think it doesn't.
The best example in chapter 1 is condom use by Mexican prostitutes. It's easy to say "A prostitute would have to be a brain donor not to use a condom every time." But Tim demurs. By bargaining about condom use, instead of using every time, prostitutes raise their income by about 25%. Still not worth it? Think again:
In fact, the prostitutes know that while the risks are real, they are modest. Only one in eight hundred Mexicans carries HIV, and even among prostitutes it afflicts just one in three hundred. Even if a prostitute is unlucky enough that one of her unprotected jobs is with a man who is HIV positive, the risk that she will catch it is less than 2 percent if one of them is carrying some other sexual infection, and less than 1 percent otherwise...
As far as we can tell, the typical Morelian prostitute is acting as though she valued one extra year of healthy life at between fifteen thousand and fifty thousand dollars or up to five years' income.
Tim may sound like a typical insensitive economist in this quote, but he's firmly in the Alan Blinder "hard heads, soft hearts" tradition:
[A] rational world is not necessarily a wonderful one... Rational individuals can make choices that are bad news for others; risky sex is just a particularly clear example. And when rational individuals face a miserable set of choices, as do the Morelian prostitutes, they cannot do better than pick the best of a bad lot. We will not solve social problems if we pretend that they are caused only - or even mostly - by the mad, the stupid, and the morally degenerate.
As an academic, I'm tempted to immediately highlight a counter-example. Morelian prostitutes value a year of healthy life at up to five times their annual income. But what about Levitt and Dubner's drug dealers who risk their necks for minimum wage? Aren't they irrational?
But for now, I'm going to resist the temptation to dwell on counter-examples. You've got to learn to walk before you can learn to run. And you've got to understand rational explanations for human behavior before you can understand irrational explanations. The Logic of Life may well be the best introduction to the rational choice approach on the market. Even better, it's well-written enough to inspire even jaded academics to get back to basics. Bravo, Tim.
Posted by Bryan Caplan on January 23, 2008 at 07:41 AM in Books | Permalink
Comments
Agree with you 100% Bryan ... Harford has written a great book that demonstrates to the reader the power of the economic way of thinking.
Posted by: Peter Boettke at Jan 23, 2008 8:40:42 AM
I bought the book for my brother to participate in this book club. He is a high school economics teacher. He brought it to school yesterday to read that first chapter assignment. Before he could, one of his students needed something to do in study hall, so my brother gave him the book and told him to start reading.
Suffice it to say that the page one "blow job epidemic" was a big hit with the student and I'll let you know whether my brother keeps his job.
I guess rather than mischievous loopholes, some economists look for outlandish support for the theories. I'm not complaining...just observing.
In any case, mischief and outlandishness in economics are probably two more examples of rational choice, aren't they?
Posted by: Pete at Jan 23, 2008 8:40:46 AM
I believe the odds of a prostitute getting AIDS are far greater due to adverse selection. HIV positive males may look for reckless prostitutes, since for them the cost of unprotected sex is much smaller for them than for other males (the cost being the condom-free sex premium plus the discounted value of treating AIDS and shorter life span).
Meanwhile, there's also a moral hazard problem. HIV positive prostitutes may charge a smaller premium for unprotected sex.
Nonetheless, the game is still rational.
Posted by: Lucas at Jan 23, 2008 9:03:11 AM
Bryan Caplan – You are very kind, and given your expertise it is restrained of you not to discuss (yet) chapter eight on rational voting. Let me expand on one of your points, though. It is certainly true that rational choice theory is not new. The two biggest influences on the book are surely Gary Becker and Thomas Schelling, both of whom – albeit in very different ways – apply the rational choice perspective to non-commercial areas of life. Both have been forcing people to sit up and take notice since the 1950s. I’d be proud enough to write a book that translated Becker’s theories into everyday English and added some nice anecdotes. But I have tried to do a lot more than that with “The Logic of Life”: while the theory is well-established, what is new is the evidence. We don’t need to take Becker on faith any more, and much of the evidence has arrived within the past few years. The ideas of Daron Acemoglu, Ed Glaeser, Lena Edlund, Justin Wolfers, Dan Ariely and Betsey Stevenson all have their turn in the spotlight. The first paper to be discussed in the book is due to be published only this spring. The book is aimed at anyone who’s curious about the world, but I think even a professional economist would find fresh ideas and new evidence.
On the rationality of Levitt and Venkatesh’s cast of characters, more to follow...
Posted by: Tim Harford at Jan 23, 2008 9:24:33 AM
Pete – Sorry that your brother was caught out. A couple of people have raised eyebrows about the research on teenage sexual behavior. Perhaps it’s all about expectations. This stuff has all been discussed everywhere from Oprah to Atlantic Monthly to the op-ed page of the New York Times, usually with much hand-wringing and very few facts. Nobody seems to find that inappropriate. When an economist adds to the discussion, suddenly it is shocking.
In fact, “The Logic of Life” devotes only four pages to the subject, brings facts to the table and presents a rather optimistic view: because sex is getting riskier, teenagers are being more careful. Sure, I could have opened the book by talking about something else, but I think it’s a (rare) responsible discussion of an important topic.
Posted by: Tim Harford at Jan 23, 2008 9:27:08 AM
I have begun reading the book and enjoy it very much, BUT there is a major problem with assuming rationality in human behavior: if we assume that people are rational ALL THE TIME, then how can we possibly ever make a falsifiable prediction, which is the essence of science?
Rest assured, I am willing to assume rationality for the sake of mathematical simplification, but this assumption must run the risk of falsification from time to time to be serious. This is why the counter-examples are important
Posted by: enrique at Jan 23, 2008 9:36:59 AM
The drug dealers who risk their necks for a very low return may seem irrational to people sitting up there collecting a paycheck. But if you ask who else will hire a ghetto kid with no education who speaks a lower-class version of English and who may have a record, you have a clearer view of his choices.
Then add that he gets to carry a gun for his own protection, whereas the fast food worker is a sitting duck for whatever robbers are in the neighborhood.
On top of that, the drug dealer may be too young to be legally employable, or why runaways end up either stealing or in prostitution.
As you said, the best of a miserable set of choices.
Posted by: Pat Mathews at Jan 23, 2008 9:37:33 AM
"As an academic, I'm tempted to immediately highlight a counter-example. Morelian prostitutes value a year of healthy life at up to five times their annual income. But what about Levitt and Dubner's drug dealers who risk their necks for minimum wage? Aren't they irrational?"
They are rational, at least by the argument Levitt and Dubner make. One of the main arguments of their book is that people act in their perceived self-interest; in this example they explain this seemingly irrational behavior with the idea that these drug dealers see this life as one of their only avenues for success.
Posted by: Jonathan Gaynor at Jan 23, 2008 10:01:14 AM
"As an academic, I'm tempted to immediately highlight a counter-example. Morelian prostitutes value a year of healthy life at up to five times their annual income. But what about Levitt and Dubner's drug dealers who risk their necks for minimum wage? Aren't they irrational?"
Another possibility for this behavior is that serving as a foot soldier in a gang can be viewed as a rational gamble that they'll end up at the top of the heap someday themselves, in the same way that lots of would-be actors, directors, dancers and so forth accept staggeringly poor working conditions and pay for the chance to be one of the lucky few that make it.
Alternatively, being a gang member may provide non-money compensation in the form of protection...
Posted by: David Otaguro at Jan 23, 2008 10:41:20 AM
Apologies, didn't read the "irrational" link above, where you suggest that the gambling-for-great-success idea is glib and less compelling to you than the idea that people are just irrational.
I think you might be conflating "based an a fundamental lack of understanding of the real chances of success" with "irrational". That's reasonable in some ways... making decisions based on bad information isn't really rational, but it's also a touch facile to say that the only rational acting is that based on accurate information.
I don't feel like Logic of Life was saying rational in the sense that it's logical and perfectly-reasoned, but rather rational as in "not perverse", or "not deliberately acting self-destructively". Maybe even, "trying to maximize their potential gains within the limitations of their information and cognitive capacity".
I guess this is where the "perceived self-interest" comes in... acting on perceptions (as opposed to reality) naturally introduces flaws into reasoning and is itself not completely rational.
I also don't think he's arguing that individuals are rational actors (which I seem to recall him disclaiming explicitly), but rather that in aggregate, people tend to act rationally. But I'm not sure you were saying that in any case.
Posted by: David Otaguro at Jan 23, 2008 11:00:00 AM
In response to Pat Mathews's excellent comment. He/she wrote:
The drug dealers who risk their necks for a very low return may seem irrational to people sitting up there collecting a paycheck. But if you ask who else will hire a ghetto kid with no education who speaks a lower-class version of English and who may have a record, you have a clearer view of his choices.
Then add that he gets to carry a gun for his own protection, whereas the fast food worker is a sitting duck for whatever robbers are in the neighborhood.
On top of that, the drug dealer may be too young to be legally employable, or why runaways end up either stealing or in prostitution.
Add to that the fact that the minimum wage may price him out of jobs with a more-certain, safer future, and it may be even more rational than thought.
A black friend and I agreed, during the O.J. Simpson trial, that if we had a son, we would rather he be a drug dealer than be a leech like Kato Kaelin. At least he'd learn how to do math.
Best,
David
Posted by: David R. Henderson at Jan 23, 2008 11:04:08 AM
@Tim - I remember reading about the BJE (perhaps one of your columns?) and agree completely that the treatment is appropriate. Just to be clear, I found my brother's story amusing, nothing else. Certainly, he could have done a better job reviewing the contents first.
Posted by: Pete at Jan 23, 2008 11:04:35 AM
Sorry, I don't see why we should regard the prostitute's behavior as "rational" unless you beg the question by regarding all economic transactions as rational.
By what standard is the behavior "rational?" Would you still regard it as rational if the premium were 10%, or 5%, instead of 25%?
Posted by: Bernard Yomtov at Jan 23, 2008 11:06:17 AM
Bernard is putting his finger on a critical issue, namely what rationality means in the argument (this may apply as much to Bryan as to Tim). One notion of rationality is that the person made the right decision and chose the right margin. We don't have much evidence for that in these cases. Another notion of rationality is that the person's action is susceptible to "pattern prediction" in the sense outlined by Hayek. I view parts of Tim's book as embracing that approach. Another notion is that the person had *some reason* for doing what he or she did; that approach strikes me as too weak to be useful. At times I worry a bit that Tim is coming too close to that approach. Yet another approach is to use rationality, not as a description of the person's behavior, but rather as a description of how the economist should proceed, namely by classifying behavior into the dual categories of preferences and constraints. That tends to be my own approach and I think it is found in Tim's book as well.
Posted by: Tyler Cowen at Jan 23, 2008 11:32:40 AM
So far, I have found the book to be immensely enjoyable. I am curious about the rates of STI infection offered in the first chapter. You state, as evidence that life as a Mexican prostitute is less than pleasant, that one in six prostitutes has a sexually transmitted infection; this seems incredibly low to me. One in five Americans has herpes (although I believe this figure includes oral herpes which may or may not be sexually transmitted) and, depending on whose figures you believe, as Americans age their chances of contracting HPV skyrocket. This leaves out assorted other STIs as syphillis, chlymidia, etc. If prostitutes have STI rates lower than the average sexually active American, that is something interesting indeed.
Posted by: Trey at Jan 23, 2008 11:35:27 AM
I suspect Dubner and Leavitt's drug dealers don't just receive a minimum wage for their troubles. They get receive a surrogate family and social status as part of the package.
Posted by: Dwight at Jan 23, 2008 11:58:57 AM
I think there's also a moral hazard issue in the BJE. Yes the kids are practicing a safer sex relative to other sexual activities. But does this prospect of a "safer sex" lead more kids to begin sexual activity at a younger age? I won't pretend to know what the ideal age to begin sexual activity is, but to say that kids are becoming safer I think you have to show that those kids choosing oral sex are choosing it over regular sex and not over no sex.
Posted by: Ben at Jan 23, 2008 12:10:58 PM
I've started this book after a discussion of The Origin of Wealth, and I wonder if Bryan thinks this is an example of new work that challenges the usefulness of the traditional economic lessons. There has been no mention in Tim's book so far of computer simulation and modeling as new economic tools, and I'm waiting for possible tie-ins. In Origin, I found especially compelling the results that a community of rational actors could produce chaos in a market.
Posted by: Aron at Jan 23, 2008 12:38:30 PM
Tyler writes:
Yet another approach is to use rationality, not as a description of the person's behavior, but rather as a description of how the economist should proceed, namely by classifying behavior into the dual categories of preferences and constraints. That tends to be my own approach and I think it is found in Tim's book as well.
In this case, there seems to be no such thing as "irrational" behavior. There is only behavior we don't understand.
That's well and good, but Bernard/Enrique's points about falsifiability comes into play.
I guess you would follow up by saying that "X is rational" is not a very content-ful statement, it's more like a reminder to look for motives.
So, you can't prove or disprove "X is rational." What you can prove or disprove (and this is where the science comes in) is whether the individual really acts so as to maximize Q given constraints XYZ.
So, the name of the game here is, "who can come up with the most accurate model of human behavior."
"Just so stories" are a trap here, as they are in evolutionary biology. We are positing the underlying mechanism behind what we observe, but to be good scientists we need to make sure that our guess about the underlying mechanism gives us new hypotheses, which future observations can confirm or refute.
Posted by: mk at Jan 23, 2008 1:30:48 PM
As a followup, to respond to Tyler's qualm (from many posts ago) about Neuroeconomics often not having a clear scientific purpose: If one of the goals of economists is to accurately model human behavior, then cognitive scientists, AI researchers, and yes neurologists all need to come to the party.
The hope, presumably, is that there may be a tighter causal link between brain-states and actions, compared to the maybe weaker causal link between self-reported-mental-states and actions.
Posted by: mk at Jan 23, 2008 1:36:22 PM
"...teenage fellatrices..." Ha!
Posted by: stan at Jan 23, 2008 2:26:16 PM
Politicians risk the long-term economic and politcal health of this country everyday for short-term election results by cutting deals with labor unions at the expense of other workers, supporting monopolies like public education that deliver inferior products, and giving taxpayers money to ponzi schemes like social security that will eventually bankrupt this country.
Posted by: jorod at Jan 23, 2008 2:31:39 PM
Tyler Cowen wrote:
One notion of rationality is that the person made the right decision and chose the right margin. We don't have much evidence for that in these cases.
I'm a computer scientist, not an economist, but it occurs to me that it wouldn't necessarily be required for the prostitutes to choose a margin. Having decided to offer such a deal to customers, they could in theory learn over time what choice of margin maximises their profits.
Posted by: Dom Camus at Jan 23, 2008 2:32:45 PM
I wasn't too convinced by Harford's assertion that our brains are carrying out complicated calculations unconsciously when catching a baseball. We may acquire an intuitive feel for some Newtonian physics after observing examples of projectile motion. But if you ask me to estimate how fast my half-spherical salad bowl would fill up under a running faucet, I think my intuition would fail miserably. (it could just be that I'm stupid)
However the discussion on rationality does remind me of this passage by David Friedman:
There are lots of ways to behave rationally without reasoning your way to it. Whether or not you have logically deduced that in order to live you must eat, if you don't eat you won't be around long to have your behavior analyzed by economists. So evolution is one source of rational behavior. Trial and error is another. I have never run a map of Santa Clara through my computer, but i think I know the shortest way home from my office.For a familiar example of rational behavior without reasoning, consider the situation of an infant--with only one tool available for achieving his objective. when he is hungry or wet, he makes loud and unpleasant noises--giving any adults in the vicinity an incentive to deal with the problem. I doubt that babies think through the logic of their situation--but they take the action most likely to achieve their ends.
Friedman then goes on to proclaim that babies are rational, which I think would be debatable in light of the previous commenters' input.
Posted by: Biomed Tim at Jan 23, 2008 2:45:41 PM
Having decided to offer such a deal to customers, they could in theory learn over time what choice of margin maximises their profits.
How could they learn that? They might learn how to maximize revenues, but I don't see how they can learn to maximize profits when the cost is reduced expected lifespan.
Yet another approach is to use rationality, not as a description of the person's behavior, but rather as a description of how the economist should proceed, namely by classifying behavior into the dual categories of preferences and constraints. That tends to be my own approach and I think it is found in Tim's book as well.
I don't really understand this. Are you suggesting that economists should simply study behavior as the choices that get you the greatest utility subject to given constraints? If so, then "rational" becomes a meaningless term, doesn't it? (How do we determine preferences?) I suppose you could argue that a given set of behaviors is rational if it does not imply inconsistent preferences, but then no single behavior is rational in itself. Anyway, I suspect if you dug deep enough you would find very few individuals who are rational in this sense.
Posted by: Bernard Yomtov at Jan 23, 2008 3:11:28 PM
I wasn't too convinced by Harford's assertion that our brains are carrying out complicated calculations unconsciously when catching a baseball. We may acquire an intuitive feel for some Newtonian physics after observing examples of projectile motion. But if you ask me to estimate how fast my half-spherical salad bowl would fill up under a running faucet, I think my intuition would fail miserably. (it could just be that I'm stupid)
Suppose that I built a ball-catching robot. It might have two cameras, run calculations based on the inputs, and position its hand based on the calculations. There is no reason to believe that this robot - which carries out calculations when catching a baseball - would be able to estimate how fast a salad bowl would fill up with water. The robot is specialized. It does not have a general ability. But nevertheless it calculates.
Thus inability to estimate salad bowl filling is perfectly compatible with calculation of flying balls.
Posted by: Constant at Jan 23, 2008 3:14:41 PM
Bernard Yomtov wrote:
They might learn how to maximize revenues, but I don't see how they can learn to maximize profits when the cost is reduced expected lifespan.
If we are assuming they know the average risk per customer, I would have thought the calculation was no harder. If they do not know the average risk per customer (or have some equivalent notion of risk) it's unclear to me how they could be acting rationally in any sense. But perhaps I'm oversimplifying this far too much?
Posted by: Dom Camus at Jan 23, 2008 3:33:41 PM
In this case, there seems to be no such thing as "irrational" behavior. There is only behavior we don't understand. That's well and good, but Bernard/Enrique's points about falsifiability comes into play.
The assertion that behavior is rational may be falsifiable in the sense that some particular conceivable behavior may simply not be analyzable into preferences and constraints. You can think of preferences and constraints as a kind of coordinate system or basis. Then the question of whether a given behavior is rational becomes analogous to the question of whether a given vector space can be assigned (say) a two-dimensional basis. And that depends on the space, so the assertion that it can is falsifiable. Similarly for analysis of behavior into preferences and constraints.
If we view economics as asserting that all behavior is rational, then economics is falsifiable. If we view economics as a calculus for deriving inferences about rational behavior without asserting that all behavior is rational, then economics is not falsifiable but the claim that it is applicable in a particular way to this or that behavior is still falsifiable.
This latter possibility makes economics like math. Mathematics is unfalsifiable but useful. Math that turns out to be useless for a particular situation (e.g. applying Euclidean geometry to black holes) is not falsified, but it is shown to be inapplicable to the particular situation.
Posted by: Constant at Jan 23, 2008 3:42:59 PM
"Another notion is that the person had *some reason* for doing what he or she did; that approach strikes me as too weak to be useful."
I think there are a couple of ways to think about irrationality. If a person really does things without a reason or purpose, that is irrational. Another notion of irrationality is that the person merely did something for reasons I disagree with; that approach strikes *me* as too weak to be useful. The debate is whether or not human beings are fundamentally rational or irrational, and I would say they are fundamentally rational. There are exceptions, but relying on the availability heuristic here or confirmation bias there is not evidence of irrationality. Most people, most of the time, still pass Bryan's "gun to head" test with flying colors; i.e. raise the costs enough, they change their behavior. It may seem like cheating to take individuals' risk preferences, etc. off the table, but personally I don't see how. Preferences are fundamentally subjective, and cannot be used to define rationality in the economic sense.
Posted by: Steve Miller at Jan 23, 2008 3:45:41 PM
The robot is specialized. It does not have a general ability. But nevertheless it calculates. Thus inability to estimate salad bowl filling is perfectly compatible with calculation of flying balls.
That is true in the case of your specialized robot. But Harford used the baseball catching example to justify that we have a general ability to do a cost-benefit analysis unconsciously:
...I do not argue that we have the consciously calculating mind of a Mr. Spock. We do make complex calculations of costs and benefits when we act rationally, but we often do it unconsciously, just as when someone throws a baseball for us to catch, we aren't conscious of our brain solving differential equations to work out the calculations behind catching the baseball if you gave us a pen and paper, yet the brain carries them out unconsciously.
I think his definition of rationality would have been better served by simply claiming that we attempt to carry out some kind of calculation--mostly very simple ones--without suggesting that the brain is some kind of blackbox that calculates differential equations unconciously.
Posted by: Biomed Tim at Jan 23, 2008 3:46:06 PM
I think his definition of rationality would have been better served by simply claiming that we attempt to carry out some kind of calculation
Actually I think his main, key point is that rationality does not require conscious calculation. The word "attempt" suggests conscious effort, so it may not be the best word for him to use here. As for the rest, maybe he should revise his statement so that there is less of a suggestion about how, precisely, the brain manages to optimize, but I don't think it affects his key point about it not necessarily being conscious.
Posted by: Constant at Jan 23, 2008 4:03:48 PM
RE: BJE
Why are sensationalized versions of stories given the majority of media attention (rhetorical)? Clearly, a frank and honest discussion based on facts, counterpoints, and general civility would be lost on a vast majority of media consumers. However, I would like to thank Tim Harford for addressing his chosen topics in a very direct and engaging manner.
RE: Baseballs
I think the brain is absolutely a blackbox calculator when it comes to catching a baseball. No two trajectories from a struck ball will be identical. The brain must have the ability to adjust for an infinite number of scenarios related to wind, air density, etc. Having sat in Wrigley Field’s bleachers and watched fans attempt to catch home-runs (usually from opposing teams), I can tell you that Old Style is a sure-fire way to break this calculator.
Posted by: Chicagoan at Jan 23, 2008 4:05:52 PM
Constant said:
The assertion that behavior is rational may be falsifiable in the sense that some particular conceivable behavior may simply not be analyzable into preferences and constraints....
If we view economics as asserting that all behavior is rational, then economics is falsifiable. If we view economics as a calculus for deriving inferences about rational behavior without asserting that all behavior is rational, then economics is not falsifiable but the claim that it is applicable in a particular way to this or that behavior is still falsifiable....
These points make sense, although I would like to prod things in a more pragmatic direction.
What does it really mean to be falsifiable? What does it mean to say that I cannot analyze a person's behavior into preferences/constraints? I can come up with some example where a person behaves in a "contradictory" way. But how do I know there is no lurking variable?
Let's say I like cheese on Sundays but not on Tuesdays. How do I decide that I cannot explain this in terms of preferences? In the most trivial logical sense, why can't I just "have a preference for Sunday cheese?" Or to look at things in a practical way, how could I possibly rule out all possible preference explanations?
Can you really falsify "rationality's applicability to some situation" without breaking determinism? What does it really mean for an action to be "analyzable in terms of preferences?" What is a preference? If it was a brain hiccup that made me behave a certain way at a certain moment, was that a transient preference mediated by a brain hiccup? If brain hiccups are what cause irrationality, how do I tell the difference between a brain hiccup and "legitimate, ordinary preferences"?
Or, if I only like cheese when I am in a good mood, does that mean that I am irrational (my behavior is not analyzable in terms of preferences)? Or does it mean my preferences change with my mood?
I think the answer to all these questions is "whatever set of answers and definitions tells the simplest, most usable story is probably the one we want." We graduated from geocentricity/epicycles to heliocentric elliptical orbits not because epicycles were refuted by the data, but because of pragmatic, even aesthetic considerations, and matters of simplicity.
So I would argue that we don't have a good definition of "irrationality" because we haven't identified some clear set of patterns that it would be useful to call "irrational." And if we try to say something is "irrational" if it "cannot be analyzed into preferences", I would say we need a clear definition of "preferences". If preferences can be whatever I want them to be, even unconscious things that happen in the brain, then our definitions are sounding vacuous again.
Of course, it is ALWAYS possible to ask whether or not a person's behavior is consistent with a particular model of how they act. But when the person's actions do not match the model, it merely tells us that our model is not accurate. "Rationality" is a statement of the existence of some model, not a property of a model.
In other words, the right formulation is:
IsRational(Behavior) iff Exists(Model) SuchThat ModelPredictsBehavior(Model, Behavior)
as opposed to the wrong formulation which many like to use:
IsRational(Behavior) iff ModelPredictsBehavior(MyFavoriteModel, Behavior)
Posted by: mk at Jan 23, 2008 4:53:13 PM
If we are assuming they know the average risk per customer, I would have thought the calculation was no harder. If they do not know the average risk per customer (or have some equivalent notion of risk) it's unclear to me how they could be acting rationally in any sense. But perhaps I'm oversimplifying this far too much?
If they know that, and have in mind the value of a lost year, then I think you are correct. I was trying to say, I suppose, that this is not something you learn by experience, as you might learn the revenue-maximizing prices.
Nor do I think the prostitutes really know the risk. The best number Harford provides, at least in the quoted excerpt, is that 1 in 800 Mexicans carry HIV. As others have pointed out, this tells us little about the infecton rate among the johns who are willing to pay extra for unprotected sex.
Posted by: Bernard Yomtov at Jan 23, 2008 5:39:01 PM
Aron,
I too have just begun reading Beinhocker's book: "The Origin of Wealth." It provides evidence that full blown general equilibrium models have little connection to reality. Although I've only read 127 page of Beinhocker's book, I am getting the impression that he is ready to "throw the baby out with the bath water". What I mean is that he seems too eager to believe that the concept of "equilibrium" is a completely mistaken metaphor in economic in general (no matter whether it is a partial equilibrium model, or a simplified general equilibrium model, or a full blown general equilibrium model). But, as I said, I'm only on page 128, so I'll have to hold off a bit until I reach page 454. (I might mention that "Sugarscape", for example, was far less impressive to me than it seems to have been to Beinhocker as evidence repudiating the usefulness of the concept of equilibrium in economics.)
But, in light of the discussion above, I look forward to having a look at Tim Harford's book in the near future to POSSIBLY (remember I'm less than a third into "Origin") regain my balance after finishing Beinhocker.
Posted by: indiana jim at Jan 23, 2008 5:54:03 PM
It's important not to conflate the 'rational' of economics lingo with the 'rational' of philosphical lingo (or mathematical lingo, for that matter). My simple mental mneumonic is that behavior is (economically) rational if the agents respond to incentives to maximize their benefit.
I think the best thing in the first chapter, toward getting the point across, was to point out that behavior becomes rational with experience (as with the rats and the card-traders). Novices are more likely to make choices that turn out bad.
Saying that people usually act rationally is only saying that people are capable of learned behavior. The vast majority of human behavior is operant conditioning. Even among logicians. See donut. Drool. I haven't read chapter two but I suspect it amounts to: gamble, get an endorphin rush, so gamble again.
Posted by: efp at Jan 23, 2008 5:54:47 PM
Applying the David Friedman quote to this chapter: a common way of acting rationally is to simply copy what other people are doing in similar situations. If prostitutes & customers have come to a sensible equilibrium pricing schedule (and there's sufficient transparency) then it's sufficient to price in line with the market to be rational, without doing any cost-benefit analysis at all. And that schedule might be reached in the first place simply by aggregating some very noisy estimates of the cost-benefit tradeoff.
Obviously this can be biased, and its response to new information (say a spike in the HIV rate of customers) may not be incorporated very fast. But in general, the forces that make markets (mostly) efficient also make relying on a market price a good heuristic for being close to rational.
As for the BJE, there aren't so much market forces, but there is to some degree a shared analysis of the problem and thus a common consensus (or perhaps just the average solution) rates to be reasonably optimal.
I would guess that most of the computation that goes into rational decisions is actually outsourced to others in this way.
Posted by: fmb at Jan 23, 2008 7:32:14 PM
I'm sorry, but I thought a downward sloping demand curve was a sufficient condition for rationality, and that seems to be what Harford is saying as well. If the cost of sex goes up, prostitutes, and teenagers, will supply a smaller quantity of sex. If the prostitutes(not the teenagers) are compensated well enough, the cost effectively decreases and they will supply more. Any eloquent language and extravagant excuses do not invalidate the law of demand. Just as planes and helicopters do not disprove gravity, they only do what they do in the context of gravity. As they fly, gravity still acts upon them. So it is with the law of demand.
Posted by: stanfo at Jan 23, 2008 8:10:50 PM
Some great comments and questions, and I am sitting in JFK airport, heavily jetlagged. I feel I need to offer some (brief, partial) responses before the discussion moves on.
Re: rationality. I am unabashedly pragmatic here. The mathematical definition of rationality is framed in terms of consistent choices that allow a mapping into a utility function. This is a useful concept for economics texts, but not for the general reader. I prefer to say that the preferences have to be intelligible (we not believe that the typical prostitute would prefer to catch an STD, for instance) and look for evidence of tradeoffs - accepting money in exchange for a higher risk of infection. Also, I look for consistency: no endowment effects or hyperbolic discounting, to use the technical terms.
This is a fairly relaxed standard of rationality but still a strong statement when applied to eg teenage sexual behavior, dating and divorce, office politics and so on. It is also falsifiable, and (in chapter two) sometimes falsified.
With the prostitutes, we have an additional point of reference: we can compute their implicit valuation of their own health, relative to income (a year of healthy life is valued at 2-5 years income, if I recall correctly) and compare that valuation to those derived from other sources, such as surveys and the risk premium paid to workers in hazardous jobs. The numbers match up very well, which suggests some sort of consistency across people in very different circumstances, although not an absolute standard of rationality.
Posted by: Tim Harford at Jan 23, 2008 9:56:34 PM
How rational is it to borrow against your house to buy crap you don't need.
Posted by: adam at Jan 23, 2008 10:03:00 PM
Now, a question. In the research I describe on Mexican prostitutes - which was led by the highly respected economist Paul Gertler - we see that sex workers from Morelia often use condoms and demand a decent premium for putting them to one side.
In the new Levitt/Venkatesh paper on prostitution in Chicago - which I have skimmed but do not have here with me - I recall that Chicago sex workers use condoms more rarely and demand very little premium for unsafe sex.
This, to me, seems to be a genuine puzzle. The Chicago sex market seems to be far more of a niche, wheras in Mexico most prostitutes are paid simply for plain vanilla sex. Does that suggest any resolution of the puzzle? I suspect, also, that Chicago prostitutes are in a much more desperate situation relative to the society around them. Prostitutes in Morelia earn a premium relative to other women. But this is wild speculation - does anyone have something more informed to offer?
Posted by: Tim Harford at Jan 23, 2008 10:03:26 PM
I had some similar thoughts when reading the first chapter that a couple of comments have touched upon.
First, I agree in general with Biomed Tim's comments about the line "...we aren't conscious of our brain solving differential equations to work out the calculations behind catching the baseball..." It seems to me that people simply pattern match. When trying to catch a baseball, people just assume that the baseball will follow a similar path to other baseballs that they've seen thrown. The more experience someone has at catching baseballs, the more patterns that person has available for comparison, and the better he will be at catching that ball (relative to his less experienced self).
Second, I too noticed that the STD (or STI or whatever they're called now) rate for prostitutes seemed low compared to the American figures (mentioned by Trey). Either the American figures are exaggerated, the prostitute numbers are under reported (either b/c of lying or b/c some prostitutes are unaware of them), or these are relatively clean prostitutes. Any comments on this?
Posted by: Dave at Jan 23, 2008 10:37:09 PM
One interesting thing about the definition of "rational" that Tim proposes is that we have no idea if it is conducive to happiness. Phenomena like hyperbolic discounting probably reflect important facts about the brain (e.g. "When I am thinking about Potentially-Imminent-Thing X, I get anxious for it and can't wait to have it"). Is it wise or unwise to contradict these impulses in the name of "rationality?" Do we suffer a hit to our endorphins each time we do contradict our desires in this way? Maybe after training, we could make ourselves avoid this endorphin effect.
Of course, we circumvent endorphin-rush desires all the time in the name of planning, but I wonder whether some degree of hyperbolic discounting is not intrinsic to successfully pursuing desire.
Of course, no one ever said happiness and rationality were the same thing. But consider a silly thought experiment. Think of your brain as part of the "external world": it is an object that you have some, but not complete, control over.
Now imagine that the "endorphin rush" is treated as endogenous to the choice problem. Human "souls" choose option A or B, where one of the factors under consideration is how each choice will affect the endorphins in their brain.
Suddenly, it looks quite rational for a human soul to apply hyperbolic discounting!
Posted by: mk at Jan 23, 2008 11:03:01 PM
One thing I liked about chapter 1 was the observation of how rational experienced people were relative to novices in an activity. I think this insight has important implications for behavioural economics.
To me it also teis in to Capaln's notions of "rational irrationality", rationality is cognitively costly and tends to be conserved. You end up allocating more effort to things you do frequently. I'll be very interested to see how this notion squares with Chapter 8.
Posted by: James at Jan 24, 2008 12:40:21 AM
With the prostitutes, we have an additional point of reference: we can compute their implicit valuation of their own health, relative to income (a year of healthy life is valued at 2-5 years income, if I recall correctly) and compare that valuation to those derived from other sources, such as surveys and the risk premium paid to workers in hazardous jobs. The numbers match up very well, which suggests some sort of consistency across people in very different circumstances, although not an absolute standard of rationality.
Maybe, or maybe not. I don't doubt you can do a calculation. I wonder how much confidence one can have in the figures going into the calculation. Is the risk of infection 1% or 2%? Is the rate of HIV infection among unprotected customers 1 in 800 or 1 in 200? (Isn't an HIV positive customer much more likely to seek unprotected sex?) How many customers does a prostitute have in a year? How many unprotected? The choice of these values, which can hardly be determined with much precision, is going to have an enormous effect on the outcome. How does the model take account of the fact that some prostitutes are already HIV-positive?
And of course there is the question as to whether the pricing represents decisions by prostitutes or their pimps.
Posted by: Bernard Yomtov at Jan 24, 2008 10:47:18 AM
I was wondering how rational choice theory accounts for data like the recent Trivedi article in NEJM showing that a small copay for mammograms leads to an apparently irrational reduction in use of mammograms. I suspect that in making health decisions (care, insurance and policy) people are frequently "outside their comfort zone", and more likely to behave irrationally.
I was also curious about the study that showed people with a relative with AIDS changed their sexual behavior. That seemed a strange example to me. When risks are well-understood (certainly the case by '92), but behavior changes in response to a relative's sickness, that is somehow evidence of rationality. Hmm. If I were an economist, I'd study the role of emotional connection in choice. Maybe this is an area where the neuroeconomists can contribute something useful.
Posted by: msi at Jan 24, 2008 1:23:43 PM
I was also curious about the study that showed people with a relative with AIDS changed their sexual behavior. That seemed a strange example to me. When risks are well-understood (certainly the case by '92), but behavior changes in response to a relative's sickness, that is somehow evidence of rationality. Hmm. If I were an economist, I'd study the role of emotional connection in choice. Maybe this is an area where the neuroeconomists can contribute something useful.
msi,
You should familiarize yourself with Kahneman and Tversky, who address these kinds of issues. The changed sexual behavior you discuss is a good example of the importance of the salience of information - its prominence. It is the difference between reading that Toyotas are very reliable, for instance, and having a good friend make a point of how little trouble he has had with his Toyota. The latter type of information tends to carry more weight in decison-making than it should, because it is more salient.
Posted by: Bernard Yomtov at Jan 24, 2008 4:15:24 PM
My simple mental mneumonic is that behavior is (economically) rational if the agents respond to incentives to maximize their benefit.
Define "benefit." Is that singular?
Posted by: meter at Jan 24, 2008 11:28:38 PM
meter,
To be more explicit, you probably mean their "net benefit" not their "benefit".
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