Tabarrok on Rationality
16 January 2009
Editor, The New York Times
229 West 43rd St.
New York, NY 10036
To the Editor:
In criticizing economists' assumption that individuals are rational ("An Economy of Faith and Trust," January 16), David Brooks misses an important point explained by my colleague Alex Tabarrok on the blog Marginal Revolution:
"Rationality is a property of equilibrium. By this I mean that rationality is habitual and experience-based and it becomes effective as it becomes embedded in the rules of thumb and collective wisdom of market participants. Rules of thumb approximate rational decision rules as market participants become familiar with an economic environment. Individuals per se are not very rational; shift the equilibrium enough so that the old rules of thumb no longer apply and we are likely to see bubbles, manias, panics and crashes. Significant innovation is thus almost always going to come accompanied with a wave of irrationality. When we shift to a significant, new equilibrium rationality itself is not strong enough to tie down behavior and unmoored by either reason or experience individuals flail about liked naked apes - this is the realm of behavioral economics. Given time, however, new rules of thumb evolve and rationality once again rules but only until the next big innovation
arrives."*
Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University
* http://www.marginalrevolution.com/marginalrevolution/2009/01/rationality-is-a-property-of-equilibrium.html
Editor, The New York Times
229 West 43rd St.
New York, NY 10036
To the Editor:
In criticizing economists' assumption that individuals are rational ("An Economy of Faith and Trust," January 16), David Brooks misses an important point explained by my colleague Alex Tabarrok on the blog Marginal Revolution:
"Rationality is a property of equilibrium. By this I mean that rationality is habitual and experience-based and it becomes effective as it becomes embedded in the rules of thumb and collective wisdom of market participants. Rules of thumb approximate rational decision rules as market participants become familiar with an economic environment. Individuals per se are not very rational; shift the equilibrium enough so that the old rules of thumb no longer apply and we are likely to see bubbles, manias, panics and crashes. Significant innovation is thus almost always going to come accompanied with a wave of irrationality. When we shift to a significant, new equilibrium rationality itself is not strong enough to tie down behavior and unmoored by either reason or experience individuals flail about liked naked apes - this is the realm of behavioral economics. Given time, however, new rules of thumb evolve and rationality once again rules but only until the next big innovation
arrives."*
Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University
* http://www.marginalrevolution.com/marginalrevolution/2009/01/rationality-is-a-property-of-equilibrium.html
Posted by Don Boudreaux on
Monday June 8, 2009 at 2:31pm