Against Behavioural Economics and Irrationality

Praising Maurice Allais as the father of behavioural economics rather than Kahneman and Tversky,  John Kay introduces us to some of Allais’ ideas while simultaneously providing one of the finest arguments against the simplistic view of behavioural economics as the study of irrationality:

The skill of piecing together sense from fragmented and inaccurate information is a central attribute of human intelligence. Literal interpretation, and insensitivity to context, are not marks of rationality but mental disorders. […]

The [behavioural economics] experimenter’s trick is to construct an artificial situation in which normally sensible behaviour gives what he thinks is the wrong result. The “mistake” is detected in a meaningless problem designed solely to elicit the “mistake”. […]

Allais was less concerned to show that our behaviour was irrational than to argue that the premises of rationality itself were irrational. […]

Allais’ most famous experiment showed that we often treat very high probabilities very differently from certainties, although “rational” individuals would regard them as almost the same thing. But very high probabilities often are different from certainties: very high probabilities are usually derived from calculations whose relevance and validity are themselves uncertain. […]

Irrationality lies not in failing to conform to some preconceived notion of how we should behave, but in persisting with a course of action that does not work. Sometimes in modern economics and political life, there is a big difference.

The example Kay uses is a bit glib but does serve its purpose.That last paragraph, however, is the crux of it all. As you may have guessed, this is the Allais that designed the Allais paradox — an experiment in behavioural economics that shows the above wonderfully.