TALK/Renowned economist talks about “rational choice” and some of its alternatives.
Where philosophy, politics and economics collide is where Thomas Schelling is most at home. Best known for his 1960 landmark book on game theory, “Strategy of Conflict”—which was named one of the 100 books that have most influenced the West since 1945—Schelling has spent time at the White House, the Rand Corporation and Yale. For 30 years, he taught economics at Harvard, and on April 14 he spoke at Logan Hall for the annual Goldstone Forum lecture.
Schelling’s subject was rational choice—or rather, the ways that we stray from rational choice, and why. “We can’t do without rational choice, “ he told the audience, “but we need to look at departures from it because we can make better use of it if we know where we may go astray.” Examples of departures from rational choice, he said, include simple bad judgment, logical fallacies, phobias, temptation and superstition, and even where we expect to see rational choice, we are often surprised.
Schelling used the example of homeowners’ insurance. When he bought a house in Cambridge, Mass, 15 years ago he shopped around for insurance and found he could get a deductible of $250, $500 or $1,000. “How about a deductible of $10,000?” asked Schelling. Not possible. Rationally, you would think that a homeowner who had spent half a million dollars on a home would be interested in the option of a higher deductible for a lower premium. The fact that such an option doesn’t exist, coupled with the fact that identical policies from different companies can carry premiums that vary by a factor of two, shows the market is neither rational nor reflecting the rationality of purchasers, said Schelling.
The predictable ways people jump to irrational conclusions, he said, show how logical fallacies are alive and well in a supposedly rational world. To prove his point, he asked the audience to imagine walking into a public library and seeing a man in a jacket and tie reading Proust. “Is he a professional violinist or a truck driver?” he asked. Most people would lean toward the well-dressed Proust reader being a violinist. But, said Schelling, consider this: There are around 250,000 professional violinists in the U.S. and three million truck drivers. If one out of a hundred truck drivers wears a jacket and tie, the Proust fan is more likely to be a truck driver than a violinist.
Another example from Schelling: Linda is 31, single and outspoken. She majored in philosophy, is interested in social justice and has participated in anti-nuclear demonstrations. Rate the likelihood of the following statements: 1. She is active in the feminist movement; 2. She is a bank teller; 3. She is a bank teller and a feminist. When presented with these scenarios, Schelling said, people invariably rank number 1 as the most likely and number 2 as the least likely, with number 3 ranking higher than number 2.
“It would be hard to be a bank teller and active in the feminist movement without being a bank teller,” said Schelling pointing out the gap in logic into which we so naturally fall.
Superstition, according to Schelling, is a particularly fascinating realm. When Isaac Newton posited that lead could be turned into gold, it was regarded as science, not superstition. A hundred years later, it would have been labeled superstition, since science had progressed to the point where we knew that one element could not be transmuted into another. Fast forward another hundred years and we now understand that irradiation can in fact do just that. “What are the laws of nature,” said Schelling, and what is superstition or rational fact, “depends on the science of the time.”
Though some of the ways we depart from the rational—phobias, addictions, depression, fear or anger—can be pathological, our natural ability to disassociate is also what makes us human and makes us able to enjoy great books, plays and movies. Those art forms, said Schelling, “rely on our capacity to be captivated.” We bristle with anticipation to find out what will happen in a novel or a movie. But is that rational, when we know what is being presented is not real? Hardly. But in a rational world, here is an example, said Schelling, of an area where sticking to rational choice, even if we were able, would leave us at a distinct disadvantage.
Originally published on April 28, 2005