The Mysterious Methodology of Rational Choice Theory

Christopher Clarke

In the last few decades, economists have puzzled over the curious phenomenon of so-called ambiguity-averse preferences. You are indifferent between (A) receiving a cash prize if a coin lands heads, and (B) receiving the prize if a coin lands tails. You are also indifferent between (A*) receiving the prize if the Nikkei stock index goes up and (B*) receiving the prize if it goes down; for you are totally ignorant about the Japanese stock market. But you prefer (A) to (A*), and you prefer (B) to (B*). Thus, intuitively, you prefer gambling on the more familiar toss of a coin than on the less familiar stock market.

Now, your indifference between (A) and (B) suggests that you think that the coin landing heads is just as likely as tails; standard rational choice theory says it has probability ½. Similarly, your indifference between (A*) and (B*) suggests that you think that the Nikkei going up is just as likely as its going down; it also has probability ½. So standard rational choice theory says that (A), (B), (A*), and (B*) really amount to the same thing, namely, receiving the cash prize with probability ½. Therefore the standard theory is inconsistent with your preference for (A) over (A*), and (B) over (B*). And to accommodate such ambiguity-averse preferences, many economists have proposed variations to standard rational choice theory. But how are economists to go about modifying the standard theory, the theory of individual decision-making that constitutes a bedrock assumption of most economic models?

Introductory courses in economics teach students that there is a sharp distinction between two branches of economics. On the one hand there is ‘positive economics’ whose job is to describe and explain economic phenomena such as prices, unemployment, and consumer demand. On the other hand there is ‘welfare economics’ whose job is to tell national governments how they should intervene in the economy. Students are thus taught to keep the descriptive and the evaluative projects within economics sharply distinct. Given economists’ invocation to keep descriptive and evaluative projects distinct, one might expect economists to distinguish two theories of individual decision-making. On the one hand, there might be a theory of what decisions—as a matter of actual fact—individual agent’s will make in various contexts. On the other hand, there might be a theory of what decisions an individual has reason to make in these contexts; or of what is required of the agent in order to count as rational.

But this expectation will be confounded. For when it comes to rational choice theory, economists tend to mix the descriptive project with the evaluative one. The really curious thing, I find, is that economists conflate the question of whether a new proposal gives an accurate description of actual agents’ choices, from whether the proposal delineates the requirements of rationality. In particular, those economists who propose theories that can accommodate ambiguity-averse preferences (for descriptive purposes) think it very important to defend ambiguity-averse preferences as rational. They wouldn’t be satisfied to claim that ambiguity-averse preferences are widespread, but irrational. (See the contributions to the 2009 special issue of Economics and Philosophy, for instance.)

This practice raises some foundational questions. Does this practice signal a shift in the philosophical assumptions of economists, a jettisoning of the sharp distinction between description and evaluation, between positive and normative economics? Or is something deeper going on in the special case of rational choice theory? Do these economists think there is a deep conceptual tie between theories that describe decision-making and those that evaluate it as rational or irrational?

Christopher Clarke
University of Cambridge
mail@chrisclarke.eu