Normative Rationality and the Euvoluntary Spectrum

NYU economics and law professor Mario Rizzo spoke in Arlington last week on the topic of rationality and irrationality. Like him, I am fascinated by paternalism. His project these days is to challenge the new paternalism (unfortunately dubbed by its proponents "libertarian" paternalism), where most of the examples we reference here at EE invoke the old-fashioned variety.

That's us, like a slow ride down the Mississippi, sipping on a cool sasparilla, we're just a little old fashioned here.

Rizzo makes the very interesting point that there's a big difference between what economists think of as "rationality" and the way everybody else uses the word. In the econ profession, we use the Arrow-Debreu criteria, which boils down to complete and non-transitive preferences. Much of what behavioral economics has done is to take the A-D definition of rationality and poke holes in it. These researchers then find that real live people violate assumptions of rationality so are therefore irrational. Irrationality has policy implications, which helps explain why Cass Sunstein can end up as the administrator of the White House's Office of Information and Regulatory Affairs.

Let me give you one of my favorite classroom examples of irrationality-by-economics*. Lady Moffet's beloved nephew calls and asks if she'd like to come over for a nice cup of tea and some scones. Delighted, she readily agrees and sets a date for a fortnight hence. Three days later, her nephew calls back with a slight change to the invitation: instead of just tea and scones, he will have tea, coffee and scones. She's not a coffee drinker, so the addition of the extra beverage is what we'd call an irrelevant alternative. Accordingly, and consistent with strict economic rationality, she confirms the appointment, well aware she has no intention of drinking coffee. Three days after that call, he phones yet again. Now, instead of coffee, tea and scones, he will have coffee, tea, scones and cocaine. She abruptly cancels the plans and slams down the receiver as hard as she is able with her dainty, birdlike hands. What gives? She doesn't consume candy of the nose variety, so why should the blow be any different than the coffee? It's just another irrelevant alternative, right?

Here, according to Mario is where the strict neoclassical definition of rationality falls flat on its face. Humans are contextual creatures and they make decisions as such. The behavioralists have turned the definition of rationality as used by the econ profession into a totemic standard, labeling deviations as irrational. Contrast this with the way most regular folks would look at Lady Moffet's outrage: her decision was entirely rational, since she didn't really care much about the scones or the tea, but instead the pleasure of her nephew's company which may have been tainted by coke-fueled rants about the corrupting influence of Hollywood on the national dialog. When people use the term "rationality", they use a normative definition that comports with "what a level-headed person would do in this situation" as opposed to the positive definition assumed by the econ profession.

The rest of Mario's talk explored this idea in greater detail, but I couldn't shake the suspicion that there's some overlap with what he's doing and the EE project. Both projects take seriously the idea that moral intuition drives attitudes towards permissible exchange. Both projects take aim at paternalism. Most interestingly, both projects worry about deviations from morally acceptable trade. Here at EE, we concern ourselves mostly with exchanges made on unequal footing (BATNA disparity), whereas the Nudge folks fret over regret (I've posted before on regret, and I still think that post has some interesting ideas worth pursuing). The questions that occurred to me following Rizzo's talk were something like:

• Does euvoluntary exchange presume rationality? Are there euvoluntary exchanges that violate either normative or positive rationality conditions?
• Does the rationality spectrum map to the euvoluntary spectrum? Is it rational to agree to a coercive exchange, for example?
• If there is a map of exchange in rational-euvoluntary space, what does this imply for policy, especially once we incorporate some of my musings on the nature of regret?
• Most importantly from a purely selfish perspective, are these questions interesting enough to become a research project? 
• And finally, what about Andrea's Question? The new paternalists already have their hands on the levers of policy. How do we excite popular condemnation of a kinder, gentler paternalism? What's a euvoluntarist to do?

I'll try to address some of these questions in a forthcoming post. I'll expand my 2x2 regret matrix a little bit to accommodate normative rationality and see what happens when we vary coercion. Stay tuned!

*I wish I could remember the attribution for this. I think I heard it first from Jerry Brito, but it's been borrowed so much, I'm not sure who originally wrote it. Heck, for all I know, it might have been Munger himself.