When it could matter if people are irrational
Previously, I’ve made the case that for the purposes of modeling, it doesn’t matter if people are truly rational (where rational is defined as always making decisions in such a way to maximize their utility functions to the best of their ability). However, just because, for the purposes of modeling, the two things are equivalent does not mean that it is always an unimportant distinction to make. Consider the idea of markets as information aggregators.
When people take actions in any kind of market, they are providing some information about their preferences to everyone else. If I won’t buy a can of peas for more than $1, I’m signaling to everyone that I value peas at $1 or less, and that if you can provide them to me at that price or less, you are creating value. If I am rational, my behavior is presumably a perfect signal of my preferences – even if you think that those preferences are weird. If, however, I am irrational, I am sending false signals with my systematically biased behavior – if I truly value peas at $0.50, but I irrationally consistently choose to pay $1 for them every time, you will think that you are creating value by making peas for $0.75 when in fact you are destroying value.
This problem exists whenever you are trying to harness the information-aggregating power of any kind of market (including democracy, which is a specific kind of market). Imagine a market in, say, health care. If people honestly and truly would prefer more health, but rather than optimizing their utility function for health, they optimize some rough heuristic based on correlates of health (equating more health care with more health, equating more antibiotics with more health, etc), they will be less healthy in the end because of their irrational behavior – which sucks for them.
In the end, however, this only matters if you want to measure peoples’ actual utility functions (which probably only matters from a normative, utilitarian point of view). If you want to actually maximize social utility, then irrationality can throw a monkey wrench in the works. This comes up in The Myth of the Rational Voter in the form of preferences over beliefs and how they effect democracy. If democracies are constructed to aggregate information about the actual social utility created by a given program, if voters are rational with strange preferences democracies work perfectly (even if they seem to fail because the outcome doesn’t match what people say they want). If voters are actually irrational, however, they are maximizing some function that is not necessarily correlated with their utility functions, and as such democracies will fail at their task of maximizing societal utility.
One last thing I’d like to note in this post is that the fact that a difference does arise here doesn’t necessarily imply that there is a simple experiment that can be done to differentiate between whether people are rational or not. The only way to do that would again be to have an independent measure of utility that could be compared to the actual outcomes. Since we do not have a direct measure of utility, I don’t think that this difference leads to a way to distinguish between the two cases.
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