Encouraging irrationality

Most people agree that rational behaviour is a good thing, which should be encouraged through education or, if necessary, nudging. However, a new paper by Daniel Pi challenges this. In some contexts, he says, we'd benefit if we were less rational.

Take crime. The rational person weighs the benefit of mugging someone - the financial reward and the buzz of the violence netted off against the feeling of guilt afterwards - against the cost; the probability of being caught multiplied by the punishment.

But we don't really want people to think so rationally because it would lead them to actually mug someone occasionally. It would be better if they had the heuristic "don't mug people." Such a heuristic is, however, irrational in the narrow economistic sense, as it would cause people to reject occasionally profitable actions.

The best policy, then, says Mr Pi, is not to debias people, as nudgeists would like, but to bias them - to encourage the spread of the "don't commit crime" heuristic which, whilst irrational for (some) individuals is socially beneficial.

There's an analogy here with the theory of the second best (pdf). This says that if there is a market failure, welfare can sometimes be increased by moving further away from optimality rather than by moving towards it.In similar fashion, moving away from rationality might enhance aggregate welfare.

This issue might be acute in the field of corporate tax. Companies apply economic rationality in considering how to minimize their taxes, but many people think that such behaviour is detrimental to aggregate welfare. If you agree with such folk - which is another issue - the question then arises of how to increase tax morale, to inculcate a "pay fair tax" heuristic. There are (at least) three possibilities:

- Customer boycotts. These operate on the rational cost-benefit calculus of whether to pay tax, but also help foster the "pay tax heuristic" by encouraging a "doing well by doing good" ethic.

- Arrest and punish high-profile tax-dodgers. This can deter crime through the availability effect; people over-estimate the probability of events they can easily see and recall.

- Introduce an element of arbitrariness into the probability of detection and punishment. If people can't calculate the probability of getting caught and punished, they'll decide to err on the safe side.

These last two can be applied to crime generally.But they run into the objection that it's normally desireable that the law be applied equally and predictably. This, though, just repackages the paradox we began with. Part of the case for having clear and consistent laws is that they permit individuals to make rational plans. If, however, those rational plans are harmful to others, then perhaps rationality is not to be encouraged.

Comments

[Luis Enrique]

I like it. We could come up with a version of Scott Adam's masterful "How to tax the rich"

http://online.wsj.com/article/SB10001424052748703293204576106164123424314.html

except for corporations.

[anonymous]

I don't think most of the tax dodging is done by actually breaking the law. The tax law is so complicated and so corrupted by lobbyists that there are plenty of loopholes to allow tax dodging without actually committing a crime. Thus at least the last two of your solutions are not applicable.

[OAW]

The matter here is not to retreat from rationality, but to define the payoff appropriately. If you try to maximize immediate gain you will always act in a shortsighted way.
If you think ahead, you might even spend money for a sign announcing your business! What you are describing as departing from rationality, strikes me as expanding your time frame past the immediate, and rationally considering the consequences. OAW

[Keith]

Kant would say that rationality requires us to always be moral; a rational man wishes to enjoy the benefits of living in a just society and society is the product of all our actions; so we must be good in our own interests. No man wants to be deceived but deception can only be avoided if all speak the truth consistently, so we must all be truthful all the time.

Which is the same as saying we should be good as a normal human acts on the basis of sympathy for others. It is only the queer ideas of a capitalist society of selfish greed that can treat immoral dealing as a rational norm. And invite us to compute the odds of gain or loss.

[Killingsometimebeforetimekillsyou.blogspot.com]

"Kant would say that rationality requires us to always be moral".

Yes but that is self-evidently false yes? Remember Kant was a racist and a (de facto if not explicitly de jure) imperialist so the fact that his own "rationality" did not lead to "morality" is relevant here.

It also ignores the latest findings if neuroscience and cognitive science which demonstrate that Man (sic) is not rational, never has been, and never will be. (cf Joseph E. LeDoux and and Antonio Damasio). Almost all human behaviour is "irrational" looked at from some point of view or other. Who decides?

The most aggressive "rationalists" at the moment are the American "skeptiks" and the "new atheists". Both these movements lean to the Right. There is a reason for this.

[Killingsometimebeforetimekillsyou.blogspot.com]

"Shorter John Quiggin: the word ‘rational’ has no meaning that cannot better be conveyed by some alternative term. Avoid it."

http://crookedtimber.org/2005/10/14/rationality-repost/

http://crookedtimber.org/2011/09/24/the-poverty-of-rationality/

[Joseph Brenner]

It's hard to come up with a rational argument for voting (the odds that your particular vote will be the tie-breaker is small compared to the amount of effort it takes to vote).

So Democracy depends on "irrationality" (or maybe "non-rationality"?), for some definitions of "rational" at any rate.

[Andrew]

The mugging example again demonstrates as you say, a very "narrow" and simplistic calculation of what might be rational. The payoff for sticking to the dictates of conscience, moral code or social contract obviously extends far beyond the calculations for an individual instance.

Similarly, what those payoffs are are as always entirely driven by the passions.

Basing policy on a few over-extrapolations from this narrow base of assumptions would obviously be really, really stupid.

[Ian]

A very long time ago, I had a girl friend who worked for Barclays bank while they were being boycotted by students and others over their South African investments during apartheid. That consumer boycott was indeed making them worried, not least I suppose because back then the bank you chose while a student tended to be you bank for life.