"Rational Choice"

I began to write last time about the assumption underlying a lot of economic theorizing that people are "rational actors," that they calculate exactly how to allocate their monetary resources, and their acquisitive strategies such as work and investment, to acquire the maximum number of utiles. Utiles are a slightly mysterious concept that corresponds to the satisfaction of desires as measured in dollars.  Based on this assumption the prominent economist Mancur Olson wrote an entire book, The Logic of Collective Action, in which he proved using calculus that many of the most notable events in world history were impossible. 

The so-called economic theory of crime, propounded by the Nobel prize-winning economist Gary S. Becker, holds that people will violate the law if the expected value of the gains from crime, minus the cost of possible punishment multiplied by its risk, exceeds the rewards of legal economic activity. The policy prescription is to make sure crime doesn’t pay by ramping up the punishments. I suppose this might actually roughly apply to some potential white collar criminals, but as a theory of blue collar crime, it’s ridiculous. The proceeds of purse snatching or hold ups are typically paltry. The “wages” for, say, burglary, are pennies per hour. People who shoplift or rob liquor stores aren’t thinking 5 years ahead. Often, they aren’t thinking past their next bag of smack or the rent payment. And, obviously, much crime has no financial reward at all. Most violent crimes aren’t instrumental. They are personal disputes that escalate, or impulsive acts.

 So, obviously, people do not go through life coldly calculating how to maximize their utility. Most fundamentally, we just don’t have the time or energy. There isn’t room in people’s lives or brains to thoroughly or even cursorily research every product on offer, deeply and honestly ponder our short- and long-term desires, calculate the probabilities of a purchase making us happy or disappointing us (people are very bad at probabilistic intuitions anyway), and accurately allocate our resources so as to maximize our utility or happiness or whatever you want to call it.

Instead, we rely on “heuristics,” cognitive shortcuts, and we often act impulsively. The term “bounded rationality” was used by Herbert Simon in the 1950s to capture the idea that we put limited cognitive resources into decision making, enough that our choices are usually good enough to feel satisfying, even if they could be even better if we worked harder at it. I'll go into more detail next time.