We mustachian deviants are actually old school rational actors. Weird, huh?

[Malaysia41]

It struck me today, that our mustachian financial deviancy, our movement against mindless consumerism, our economic counter-culture, our dedication to take a second look at what really brings us happiness, is hardly different from that old school 'rational actor' that economists assumed everyone behaved like.  If you took microeconomics you know who I'm talking about.  Isn't it funny that this rational actor has turned out to be the exception, not the norm?

Good thing behavioral economics came along.  This field of study uses an evolved model of the rational actor - a model who falls prey to 'anchoring' tricks, fails at his job when too much money is on the line, and gives more in absolute dollars to one needy kid (on a poster) than to ten needy kids. I'm not saying we, on this forum are exempt from irrational behavior.  But, I do think we tend to do the math more often and with a sharper pencil. 

----------------------

Definition of 'Rational Behavior' (http://www.investopedia.com/terms/r/rational-behavior.asp)

A decision-making process that is based on making choices that result in the most optimal level of benefit or utility for the individual. Most conventional economic theories are created and used under the assumption that all individuals taking part in an action/activity are behaving rationally.

Investopedia explains 'Rational Behavior'

Rational behavior does not necessarily always involve receiving the most monetary or material benefit, because the satisfaction received could be purely emotional. For example, while it would be more financially lucrative for an executive to stay on at a company rather than retire early, it would still be considered rational behavior for her to seek an early retirement if she feels that the benefits of retired life outweigh the utility from the paycheck that she receives.

[senecando]

Another explanation is that the unstached might be rational and have insanely high time preferences. Doesn't stop complaining though.

[slugline]

I recently read "Animal Spirits" by George Akerlof and Robert J. Shiller -- good book describing how emotions can't be ignored when we discuss economic decision-making.

All those numbers and charts and graphs we love . . . ultimately we are trying to tell a story. . . .

[Malaysia41]

I remember in microeconomics - I never felt comfortable that their 'rational actor' was real, so I had a hard time trusting the theories.

And like I said, mustachians aren't perfectly rational.  But I think mustachian behavior is closer to what the classic economists had in mind - a lot closer than behavior of the mainstream 1st world consumer.

[sheepstache]

One of my favorite jokes and it applies to so many things in life:

Two economists are walking past a Porsche dealership.
One of them looks in the window and says, 'I want that.'
The other one says, 'Obviously not.'

[2ndTimer]

Wow if the the "rational actor" exists maybe there really is a  "local thermal equilibrium."  Exits to rewrite dissertation

[Beric01]

I think the biggest problem that economic theory doesn't take into account is that we don't really know what we want. Buying less stuff and retiring earlier might make many people happier, but they've been convinced that working all their lives to buy stuff they don't need will make them happier. People have been duped, which means they're not making rational decisions. I am fully willing to admit that I don't know what I want in life. So even if I might get more utils out of something other than what I am currently doing, I don't actually know that the activity would make me happier. Basically, we don't have perfect information on which to base our economic decisions.

[matchewed]

Remember though that a rational actor does not have a universally accepted application. Those who are not mustachian are actually rational actors as well in the world of economics. They just have different value sets which make them make different rational choices. They're still rational actors too. They just might not make the same choice as you.

[Gone Fishing]

I think it comes down to short term vs long term rationality.  Rational thought requires mental energy, a lot at times, followed by the possibility of physical energy expenditure, also a lot at times.  The typical consumer tends to hit the easy button a LOT to minimize the percieved energy/effort output in the short term which is rational, at that moment in time. This is probably a throw back to the evolution of our species. A survival instinct that tells you eat when there is food, consume when you can, because you never know when it might end. 

There is no doubt in my mind that the hurry of modern culture can initiate a survival response which makes it all the more likely that we will hit the easy button and spend the cash rather than add the additional stress of making the long term rational decision. What the "survivalist" don't realize is that they are missing out on the big pot of gold at the end of the rainbow that comes from long term financial rationality, delayed gratification, ect.

Can't remember where it was, but someone just recently posted a study which indicated just how bad people were at estimating exponential growth.  On a linear basis we do just fine, but throw a curve in there and people, on average, can not hit the broad side of a barn.

At the same time, have no doubt that our Mustachianism comes with some risk, albiet small, as the nuclear holocaust, global pandemic, comet impact,  etc could happen tomorrow.  In which case the hyper-consumer could would probably point out that we should have made the most of it while we could. (I'm not changing) 

 

[arebelspy]

Remember though that a rational actor does not have a universally accepted application. Those who are not mustachian are actually rational actors as well in the world of economics. They just have different value sets which make them make different rational choices. They're still rational actors too. They just might not make the same choice as you.

Could a choice ever be irrational under that definition?

[solon]

Remember though that a rational actor does not have a universally accepted application. Those who are not mustachian are actually rational actors as well in the world of economics. They just have different value sets which make them make different rational choices. They're still rational actors too. They just might not make the same choice as you.

Could a choice ever be irrational under that definition?

Dang post-modernist crap!

[senecando]

Remember though that a rational actor does not have a universally accepted application. Those who are not mustachian are actually rational actors as well in the world of economics. They just have different value sets which make them make different rational choices. They're still rational actors too. They just might not make the same choice as you.

Could a choice ever be irrational under that definition?

My understanding is that "rational man" qua economics is meant as a way to limit the field to the things it is claiming to study; it's saying: "we're making theories about man inasmuch as he is value-maximizing." (The term has been used in all sorts of ways, but this one, which I thing is fairly original, is actually useful.) Or, said differently, it's a way to separate the man of Wealth of Nations from the man of Theory of Moral Sentiments.

From wiki, Mill: "[Political economy] does not treat the whole of man’s nature as modified by the social state, nor of the whole conduct of man in society. It is concerned with him solely as a being who desires to possess wealth, and who is capable of judging the comparative efficacy of means for obtaining that end."

[matchewed]

Remember though that a rational actor does not have a universally accepted application. Those who are not mustachian are actually rational actors as well in the world of economics. They just have different value sets which make them make different rational choices. They're still rational actors too. They just might not make the same choice as you.

Could a choice ever be irrational under that definition?

Probably not. Much like senecando said above it is about value maximizing. Given different sets of values and yes you come to that conclusion that there is no such thing as an irrational choice except from outside that choice, or perhaps as hindsight (which would probably be outside that choice as well :) ).

Essentially it comes down to that someone may have appeared to make an irrational choice if you have information they do not or if your value system is not the same. But in that person's context they haven't made an irrational decision, perhaps an uninformed or different valued decision.

This gets me thinking about sanity for some reason. Illusion of sanity or consciousness. Where a person with a psychosis is considered to have lost contact with reality in some way, doesn't that mean we're all insane? Or to tie it in we're all rational actors to our own actions all the while seemingly completely irrational in the eyes of (some) other people.

But then again I may just be rambling on in my own head. :D

[Mr. Frugalwoods]

I freely refer to myself as a Frugal Weirdo.

I'm no economist, but doesn't the idea of a Rational Actor also depends on the person having perfect information?  I'd argue that a lot of non-mustachians don't understand the astoundingly simple math.

[marblejane]

Yes, the assumption of perfect information is common - there is no such thing as irrationality in rational choice theory. We are just all utility maximizing.  Lovely wikipedia page on rational choice theory here: http://en.wikipedia.org/wiki/Rational_choice_theory

[matchewed]

Yes, the assumption of perfect information is common - there is no such thing as irrationality in rational choice theory. We are just all utility maximizing.  Lovely wikipedia page on rational choice theory here: http://en.wikipedia.org/wiki/Rational_choice_theory

Only downside in going with the wiki is that there is a big ol' citation needed next to that perfect information assumption.  But I think I agree with the rest.

[arebelspy]

I think it's interesting you believe everyone is acting rationally 100% of the time (from their perspective).

I do agree that people make what they think is the best decision constantly.  But I don't know that I agree that 100% coincides with the rational decision, from their perspective.

Can someone act, and say "I know I'm acting irrationally"?  If they truly believe they're choosing a less rational choice, but an emotional one, does it make the emotional choice somehow rational, the the "rational" choice irrational?

[senecando]

I think it's interesting you believe everyone is acting rationally 100% of the time (from their perspective).

I think that's the definition. People have wants which are all related to one another and are expressed through action. If someone says I'd rather have 100 dollars tomorrow than 10 dollars today, and then takes the 10 today, for the purposes of figuring stuff like marginal utility out, the action is all we care about.

I do agree that people make what they think is the best decision constantly.  But I don't know that I agree that 100% coincides with the rational decision, from their perspective.

Can someone act, and say "I know I'm acting irrationally"?  If they truly believe they're choosing a less rational choice, but an emotional one, does it make the emotional choice somehow rational, the the "rational" choice irrational?

Here's a terrible attempt at an example.

You're at Cartoonworld and your little human is wandering around. Goofball sees a guy in a Panda suit, takes a picture, and has a huge smile on his face. Then, he sees a stuffed Panda toy. Pandatoy costs 30 bucks at Cartoonworld and 20 bucks right outside the park. Is the emotional choice to buy the toy right there? Really, it's the same toy, etc. You buy it. "I know this is stupid but I just can't help the look on little Goofball's face."

This is irrational, or silly, or whatever, but if the market consistently bears a price fifty percent higher in the park, does it really matter? So, the economist says that you value the toy more than you value 30 dollars in the park, and more than you value 20 dollars outside the park. According to that, you've made a rational decision, though we'd call it stupid here (rightly).

You wouldn't have said you want to pay fifty percent more in the park, but of course, what you say doesn't really affect prices. If we want to understand prices, we want to understand what people actually do.

(I think the work "rational" is sort of red herring, but is unfortunately part of the jargon.)

[arebelspy]

I understand the premise of it.  :)

I want to think about it more philosophically.

Do you have any thoughts on this:

Can someone act, and say "I know I'm acting irrationally"?  If they truly believe they're choosing a less rational choice, but an emotional one, does it make the emotional choice somehow rational, the the "rational" choice irrational?

[matchewed]

I understand the premise of it.  :)

I want to think about it more philosophically.

Do you have any thoughts on this:

Can someone act, and say "I know I'm acting irrationally"?  If they truly believe they're choosing a less rational choice, but an emotional one, does it make the emotional choice somehow rational, the the "rational" choice irrational?

I think for one thing your assumption of emotion not being rational or at least slightly outside or rational is a bit off. Even emotions have value in the weighing of decisions. A tendency to overweight but that's a different discussion.

That being said, even if we eliminate that portion of what you've said, we're left with the question of in choosing between A and B, if you come to the conclusion that A is more rational but choose B anyway does it make B the rational decision?

I'm not sure that it is completely possible for one thing. I'm sure the action is but to the person making the decision they would probably raise all sorts of internal rationalization for why B truly was right all along. Post decision making rationalization. But for that one moment where that decision is made, where I've said "I'll go with B," did I make an irrational decision? Or did I just change my rational? I'll need to chew for a bit.

[arebelspy]

Keep in mind, we're not arguing if they made the right choice or not.

They think they made the right choice, no doubt.  But that's different than the rational choice.

[sheepstache]

Wasn't there that interesting psych experiment showing that people make decisions before they're consciously aware of it?  So that might have some bearing on whether we can evaluate our decisions as being rational or not.
http://www.nature.com/news/2008/080411/full/news.2008.751.html

[matchewed]

Keep in mind, we're not arguing if they made the right choice or not.

They think they made the right choice, no doubt.  But that's different than the rational choice.

So I've given this some thought. I still think that I've yet to consider an option where someone is making a deliberate irrational choice. The reason being is that the moment the individual says choice B (assuming less rational than choice A) they've skewed choice B to be more rational. Or in other words they've lent choice B an amount of value (whatever that value is) that makes it outweigh choice A.

[arebelspy]

Keep in mind, we're not arguing if they made the right choice or not.

They think they made the right choice, no doubt.  But that's different than the rational choice.

So I've given this some thought. I still think that I've yet to consider an option where someone is making a deliberate irrational choice. The reason being is that the moment the individual says choice B (assuming less rational than choice A) they've skewed choice B to be more rational. Or in other words they've lent choice B an amount of value (whatever that value is) that makes it outweigh choice A.

Absolutely.  They've given B value that makes it outweigh, so that makes it the right choice.  But does that extra value add any rationality to B?  I agree that B is the right choice, but does right == rational?

[marblejane]

I actually find behvioral economics to be very interesting, precisely because I never really bought into rational choice theory. Dan Ariely's Predictably Irrational and Richard Thaler's Nudge are two good books to check out on this topic. Thaler's studies show how things like the position of snacks in the checkout line affect which snack we choose. Or how people will or won't become organ donors depending on which option is made the default.

[marblejane]

Yes, the assumption of perfect information is common - there is no such thing as irrationality in rational choice theory. We are just all utility maximizing.  Lovely wikipedia page on rational choice theory here: http://en.wikipedia.org/wiki/Rational_choice_theory

Only downside in going with the wiki is that there is a big ol' citation needed next to that perfect information assumption.  But I think I agree with the rest.

Yeah, it probably should reference specific philosophers and economists that make a rational actor/perfect information assumption in their work. But it is done frequently- for instance, in the efficient markets hypothesis.

The efficient market hypothesis makes an interesting assumption about peoples' choices, in that it assumes that on average, people are rational and making optimal choices. So, even if one outlier's reaction is technically incorrect, it won't matter because on average people react & choose correctly.

[matchewed]

Keep in mind, we're not arguing if they made the right choice or not.

They think they made the right choice, no doubt.  But that's different than the rational choice.

So I've given this some thought. I still think that I've yet to consider an option where someone is making a deliberate irrational choice. The reason being is that the moment the individual says choice B (assuming less rational than choice A) they've skewed choice B to be more rational. Or in other words they've lent choice B an amount of value (whatever that value is) that makes it outweigh choice A.

Absolutely.  They've given B value that makes it outweigh, so that makes it the right choice.  But does that extra value add any rationality to B?  I agree that B is the right choice, but does right == rational?

But given the definition we're working with, rational decisions being associated with maximizing value, then yes the extra value equals more rationality. More rational, more value, and the right choice for that person given a set of values all kind of fall in line w/ each other. I'm still trying to think of a scenario where that doesn't happen. Even in moments where we'd identify someone as acting wrongly or irrationally it isn't for them at that moment.

[arebelspy]

Keep in mind, we're not arguing if they made the right choice or not.

They think they made the right choice, no doubt.  But that's different than the rational choice.

So I've given this some thought. I still think that I've yet to consider an option where someone is making a deliberate irrational choice. The reason being is that the moment the individual says choice B (assuming less rational than choice A) they've skewed choice B to be more rational. Or in other words they've lent choice B an amount of value (whatever that value is) that makes it outweigh choice A.

Absolutely.  They've given B value that makes it outweigh, so that makes it the right choice.  But does that extra value add any rationality to B?  I agree that B is the right choice, but does right == rational?

But given the definition we're working with, rational decisions being associated with maximizing value, then yes the extra value equals more rationality. More rational, more value, and the right choice for that person given a set of values all kind of fall in line w/ each other. I'm still trying to think of a scenario where that doesn't happen. Even in moments where we'd identify someone as acting wrongly or irrationally it isn't for them at that moment.

Right.  So you're defining it away.

I don't necessarily agree that right choice == more rational.

They can assign a choice more value and choose it because of an emotional, non-rational factor.  It doesn't make the choice more rational just because they chose it.  But your definition of rational appears to be "whatever people choose is rational, because otherwise they'd choose differently" - it seems a bit circular to me.

[matchewed]

Keep in mind, we're not arguing if they made the right choice or not.

They think they made the right choice, no doubt.  But that's different than the rational choice.

So I've given this some thought. I still think that I've yet to consider an option where someone is making a deliberate irrational choice. The reason being is that the moment the individual says choice B (assuming less rational than choice A) they've skewed choice B to be more rational. Or in other words they've lent choice B an amount of value (whatever that value is) that makes it outweigh choice A.

Absolutely.  They've given B value that makes it outweigh, so that makes it the right choice.  But does that extra value add any rationality to B?  I agree that B is the right choice, but does right == rational?

But given the definition we're working with, rational decisions being associated with maximizing value, then yes the extra value equals more rationality. More rational, more value, and the right choice for that person given a set of values all kind of fall in line w/ each other. I'm still trying to think of a scenario where that doesn't happen. Even in moments where we'd identify someone as acting wrongly or irrationally it isn't for them at that moment.

Right.  So you're defining it away.

I don't necessarily agree that right choice == more rational.

They can assign a choice more value and choose it because of an emotional, non-rational factor.  It doesn't make the choice more rational just because they chose it.  But your definition of rational appears to be "whatever people choose is rational, because otherwise they'd choose differently" - it seems a bit circular to me.

Yeah that's a valid criticism. I'd say that emotion has a value in making a decision and in the context of economics makes it a factor within the rational decision, not alien to it. In my day to day I'd say I agree that I personally weigh emotion slightly differently within the context of "is my choice a rational one?" We just might be using two different definitions for the same word depending on the context of the word. :)

[arebelspy]

Probably.  And I myself am not able to give a good definition of what would constitute a rational decision.  I just don't feel that any decision made is automatically rational due to the post hoc explanation of "well they chose it, so it's best" (true) "so it must be rational" (not sure that follows).

I enjoy thinking about it though.  :)

[Elderwood17]

I have always thought a major premise of modern marketi g is to get people to make irrational choices, through emotional and ego appeals vs anything truly rational.

[sisca]

Another explanation is that the unstached might be rational and have insanely high time preferences.

A couple of years back I read some research on how different people discount different amounts. There is actually some pretty good literature on it. People discount smaller sums of money at higher rates than larger sums of money. Also, peoples discount rates drop as they age, either through experience or age (experience seems to be the prevailent factor).

If I offered an 18 year old 1000 dollar in one year, or 800 today, I am quite sure he would choose the latter. So, he has a discount rate of more than 25 %. I might even get away with 700 today.

If I made the same offer to someone 70 years old, they would turn me down until I offered them 960, maybe even 970. They discount money at around 3 %.

Larger sums lowers the discount rate. That same 18 year old would turn me down if the figure in question was 1 mill dollar in a year, or 800.000 today.

At least, this is what the academic research tells us.

Now, to the interesting part. All these experiments and research focus on a group of people here and now. What if the entire population keeps raising their discount rates year by year, at the same time as interest rates drop ever further. If I discount money at 25 %, and nothing offers that, I will go ahead and spend that money. With interest rates this low, even old people face interest rates lower than their discount rate. So then, the rational thing is to spend.

This is of course why they lowered interest rates to begin with, to get us to spend.

Mustachians are indeed different, because we have insanely low discount rates, combined with a stomach to tolerate the risk in the markets. But just how low is your discount rate. What would returns have to drop to before you stopped saving? And I mean all returns, even real estate or the stock market. If you were convinced it was impossible to achieve more than 3 % returns in the future, would you stop saving? How about 0 %? Or -5 %?

Non-mustachians are indeed rational, they just discount money very different from us.

[Malaysia41]

I love where this conversation went. 

Behavioral econ is fascinating e.g. the discount rate differences from young to old, small $ amount to big $ amount.  Wow. 
If returns were -5% into the future I'd put my $ in something that would at least maintain its value.  Buy i bonds from treasure direct I suppose.

[Pedestrian]

When studying economics, I understood the word "rational" being used to mean roughly "trying to optimize something" -- which is confusing, because that's very different from the usual meaning of the word outside of economics. Word choice aside, I can see the usefulness of the concept, broad as it is. An agent trying (but maybe not doing a great job at it) to optimize something (although it might seem like an odd thing they want to optimize) is still probably different from an agent not trying to optimize anything at all.

But when I talk about "rationality" in normal life, I like the definitions in this article on Less Wrong:

What do we mean by "rationality"?

We mean:

• Epistemic rationality: believing, and updating on evidence, so as to systematically improve the correspondence between your map and the territory.  The art of obtaining beliefs that correspond to reality as closely as possible.  This correspondence is commonly termed "truth" or "accuracy", and we're happy to call it that.
• Instrumental rationality: achieving your values.  Not necessarily "your values" in the sense of being selfish values or unshared values: "your values" means anything you care about.  The art of choosing actions that steer the future toward outcomes ranked higher in your preferences.  On LW we sometimes refer to this as "winning".

If that seems like a perfectly good definition, you can stop reading here; otherwise continue.

And by that definition, I would agree that people here are much more rational than the average person.

[Ambergris]

Remember though that a rational actor does not have a universally accepted application. Those who are not mustachian are actually rational actors as well in the world of economics. They just have different value sets which make them make different rational choices. They're still rational actors too. They just might not make the same choice as you.

I totally don't buy this - although you're absolutely right that making up weird-ass preferences is the way to save the rational actor model for economics. But it doesn't actually work because preferences have to be real psychological/neurological motivational states that are in principle discoverable by good scientific work in the appropriate fields. If we can figure out what people's brains actually represent when they make decisions it may well turn out to be nothing like what the economists claim.  It's what makes classical economics so freakin' bizarre as a field. So much of it is a bunch of math not only that doesn't model any social or psychological system in the real world, it is also specifically not intended to.

This is why good economics desperately needs good psychology and neuroscience.

[arebelspy]

matchewed: If something is predictably irrational, does that make it rational?

[matchewed]

matchewed: If something is predictably irrational, does that make it rational?

I've read Ariely's book, I enjoyed it immensely. How I see this affecting what I've said is as follows. First Ariely is coming from an observation of other people's behavior. It's quite easy to label someone else as irrational. I know he's not doing that all willy nilly and is using studies to determine flaws in human reason or rationality if you will. And that's the other definition of rationality that I think the economic usage of the term is lacking. Rather psychology and economics use the same word but mean different things. At least that's my take on it.

The other part of it is the concept of how much information is known to the person making the decision. Sometimes economics uses the "perfect knowledge" concept as an assumption to statements like people behave rationally. I actually have a bigger issue with the concept of perfect knowledge than I have with people acting rationally at each moment of decision. The reason for that is that people as Ariely points out can be given misinformation, or manipulated in such away to deliberately change their value sets while making a decision. So I'd step in and throw out perfect knowledge way before I can come to a conclusion that a person is deliberately acting irrational within the context of their own values.