Why are we so irrational when it comes to money?

Posted on January 25th, 2008 by bile Categories and Tags: Uncategorized, America, chemical, debate, economics, Germany, Historical School of Wirt-schaftliche Staatswissenshaft, Ludwig von Mises

8 Responses to “Why are we so irrational when it comes to money?”

1. beetlbumjl Says:
   January 25th, 2008 at 10:58 am

   Some suggest that while markets are rational in the long-term, they are very often irrational short-term (for such reasons as the movie ticket scenario above).  Do you feel this phenomena encouraged or dampened by gov’t intervention?

2. bile Says:
   January 25th, 2008 at 11:28 am

   I take issue with the idea that human action is "rational" or "irrational." It simply is. Seems to me that the idea that an action can be labeled one or the other implies an objective point of reference in which to do so. It’s a similar issue I have with Rand Objectivism. I don’t subscribe to this idea so I can’t comment on how it’s affected by government intervention. I do not believe planned economies can work.

3. bosco Says:
   January 25th, 2008 at 12:23 pm

   "Irrational" is a subjective term.  The judgment of whether or not something is rational lies in the eye of the beholder.  I find your inability to realize the subjectivity of human language irrational.

4. beetlbumjl Says:
   January 25th, 2008 at 3:51 pm

   How do you begin to predict or model human behavior if nothing is ever rational or irrational?  I’d like to consider the use of these terms as determined by a system.  For example, a free market system assumes that behavior A is rational.  On the other hand, socialist system assumes that behavior B is rational. 

5. bile Says:
   January 25th, 2008 at 4:50 pm

   Mises says in Chapter 1 Section 4 of Human Action:

   Human action is necessarily always rational. The term "rational action" is therefore pleonastic and must be rejected as such. When applied to the ultimate ends of action, the terms rational and irrational are inappropriate and meaningless. The ultimate end of action is always the satisfaction of some desires of the acting man. Since nobody is in a position to substitute his own value judgments for those of the acting individual, it is vain to pass judgment on other people’s aims and volitions. No man is qualified to declare what would make another man happier or less discontented. The critic either tells us what he believes he would aim at if he were in the place of his fellow; or, in dictatorial arrogance blithely disposing of his fellow’s will and aspirations, declares what condition of this other man would better suit himself, the critic.
   

   From http://www.quebecoislibre.org/06/060205-5.htm:

   Praxeology, the science of human action, begins with the action axiom. Action, exhibited by all humans, is "purposeful behavior" (Human Action, p. 11). An acting man perceives a certain set of ends as subjectively valuable and then chooses means that he thinks will attain those ends. The goal of all action is ultimately the satisfaction of the individual actor: "Acting man is eager to substitute a more satisfactory state of affairs for a less satisfactory. His mind imagines conditions which suit him better, and his action aims at bringing about this desired state" (HA, p. 14). In order for action to occur, two conditions must be met. The actor must be dissatisfied in some manner. Furthermore, the actor must consider himself capable of remedying his specific dissatisfaction. If this is so, then the actor will pursue the dissatisfaction’s elimination, provided that the benefit of eliminating it exceeds the disutility of his own labor in doing so.

             From the perspective of the agent, all action is "rational" in the sense that it has reasons behind it: the agent thinks that the means he chooses will bring about the ends he desires. The acting man may be mistaken in his interpretation of the facts of reality and might therefore falsely perceive causality where none exists. In retrospect, he might realize his past mistake and adjust future actions accordingly. However, it remains true that he had a clear reason behind his past decision, based on false information though it might have been.

   And Praxeology and Rationality:

   Few features of the praxeological position seem to have been more seriously misunderstood than the very special significance that it attaches to the rationality of human action. In the praxeological view, action is rational by definition; and this has been attacked from two directions. On the one hand, it has been branded as palpably false and contrary to the facts of experience.21 On the other hand, it has been interpreted as a vicious misuse of language, in which the word “rational” has been emptied of all meaning, so that its use to describe action, while not false, conveys no information whatsoever. The insistent description of action as rational is thus a misleading attempt to appear to be saying something, without, in fact, doing anything of the sort.22 To say that a man acts rationally, it is complained, tells us nothing more about what it is that he does than that he does it. Both these types of criticism rest on a quite incomplete appreciation of how the rationality of action is used in the praxeological system.
   …
   It was quite natural for the conception of rationality that was made central to praxeological ideas to be discussed in a similar fashion. When these ideas are made to hinge on a conception of rationality as a pervasive quality of all human action, they of course invited criticism as being in contradiction to the facts. And when it is pointed out that in the sense in which the praxeological view sees human actions as rational, no such contradiction exists, then the praxeological postulate of rationality is criticized as a misleading and empty use of words. It is explained, for example, that a man who is swayed from the pursuit of his own best interests by falling prey to a fleeting temptation is yet acting “rationally” in the praxeological sense. In the praxeological view, the man has simply substituted a new set of ends, represented by the fleeting temptation, for the previously chosen ends. The fact that in the eyes of an outside observer, or even in the eyes of the man himself at a cooler moment, it is the original set of ends that constitutes the man’s “best interests,” is not sufficient to justify our labeling the man’s pursuit of his newly selected goal as “irrational.” The selection of an end can never, as such, be judged in regard to its rationality; and there is no reason to question the rationality with which the man pursues his newly chosen end.
   …
   During the course of this discussion of the nature of economic error, the sense in which praxeology sees human action as “rational” will have become abundantly clear. It will also have become clear how the praxeological use of the concept of rationality is quite unaffected by both types of criticisms that we noticed to have been levelled against it. Its description of all human action as rational constitutes a proposition that is, in fact, incapable of being falsified by any experience, yet does, nevertheless, convey highly valuable information. Action is necessarily rational because, as we have seen, the notion of purpose carries with it invariably the implication of requiring the selection of the most reasonable means for its successful fulfilment.29 Such a proposition cannot be proved empirically false because, as we have seen, programs can be changed, so that evidence that a man no longer “follows his best interests” proves only that he has chosen a new “program” the necessary requirements of which no longer permit him to follow—what used to be identified as—his best interests. Despite the impossibility of its empirical contradiction, this proposition yet conveys highly useful information because the insight it provides makes possible the derivation, in regard to whatever program is relevant in given circumstances, of highly developed chains of theorems.

6. beetlbumjl Says:
   January 25th, 2008 at 5:20 pm

   The quotes clarify your position, and I understand it.  What I am asking goes back to the original quote from Mises, "…traditional or orthodox economics does not deal with the behavior of man as he really is and acts, but with a fictitious or hypothetical image."  Unless someone has the theory of everything, I fail to see how any other school of thought can model humans as anything but hypothetical.  To know man as he really is, you’d have to be omniscient.  Without that, economic theory must make assumptions of what is rational and what is not. 

7. beetlbumjl Says:
   January 25th, 2008 at 5:34 pm

   Edit — with further thought… perhaps the assumptions could be made probabilistically.  That way you’d be depending upon behavior remaining the same, rather than getting into the business of determining what is rational or not.  (Sorry for thinking out loud here.)

8. bile Says:
   January 28th, 2008 at 4:12 pm

   From the Wikipedia article:

   Mises attempted to find the conceptual root of economics. Like other Austrian and classical economists, he rejected the use of observation, saying that human actors are too complex to be reduced to their component parts and too self-conscious not to have their behaviour affected by the very act of observation. Observation of human action, or extrapolation from historical data, would thus always be contaminated by overlooked factors in the way that the natural sciences would not be (although in quantum mechanics observation of one property of a system causes uncontrollable, but generally predictable, changes in other properties).

   To counter the subjective nature of the results of historical and statistical analysis (see Methodenstreit), Mises looked at the logical structure of human action (he entitled his magnum opus Human Action). In other works he built on the methodological aspect of Economics, on a PostKantian base, the synthetic a priori.

   …

   Another conclusion that Mises reached was that decisions are made on an ordinal basis. That is, it is impossible to carry out more than one action at once, the conscious mind being only capable of one decision at a time — even if those decisions can be made in rapid order. Thus man will act to remove the most pressing source of dissatisfaction first and then move to the next most pressing source of dissatisfaction. Additionally, Mises dismissed the notion that subjective values could be calculated mathematically; man can not treat his values with cardinal numbers, e.g., "I prefer owning a television 2.5 times as much as owning a DVD player."

   …

   In human society many actions will be trading activities where one person regards a possession of another person as more desirable than one of his own possessions, and the other person has a similar higher regard for his colleague’s possession than he does for his own. This assertion modifies the classical economic view about exchange, which posits that individuals exchange goods and services that they both appraise as being equal in value. This subject of praxeology is known as catallactics.

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