Home > Uncategorized > Rational choice theory — an abysmal failure

Rational choice theory — an abysmal failure

Lars Syll

bunbgeThough an enthusiast of reason, I believe that rational choice theory has failed abysmally, and it saddens me that this failure has brought discredit upon the very enterprise of serious theorizing in the field of social study …

Rational choice theory is far too ambitious. In fact, it claims to explain everything social in terms of just three assumptions that would hold for all individuals in all social groups and in every historical period. But a Theory of Everything does not explain anything in particular … And being unable to account for differences among individuals and for the variety of social interactions, systems, processes, and institutions, the theory is bound to be unrealistic, i. e., false …

The reader may feel that my criticism is excessive: that I am throwing the baby out along with the bath water. My reaction is that there is no baby … It died long ago from mathematical anemia, from deficiency in the enzymes required to digest the simplest social facts, and from lack of exposure to the sound and light and fury of the social weather.

Most mainstream economists want to explain social phenomena, structures and patterns, based on the assumption that the agents are acting in an optimizing — rational — way to satisfy given, stable and well-defined goals.

The procedure is analytical. The whole is broken down into its constituent parts so as to be able to explain (reduce) the aggregate (macro) as the result of the interaction of its parts (micro). Building their economic models, modern mainstream economists ground their models on a set of core assumptions describing the agents as ‘rational’ actors and a set of auxiliary assumptions. Together these assumptions make up the base model of all mainstream economic models. Based on these two sets of assumptions, they try to explain and predict both individual and social phenomena.

The core assumptions typically consist of completeness, transitivity, non-satiation, expected utility maximization, and consistent efficiency equilibria.

When describing the actors as rational in these models, the concept of rationality used is instrumental rationality – choosing consistently the preferred alternative, which is judged to have the best consequences for the actor given his in the model exogenously given interests and goals. How these preferences, interests, and goals are formed is not considered to be within the realm of rationality, and a fortiori not constituting part of economics proper.

The picture given by this set of core assumptions – ‘rational choice’ – is a rational agent with strong cognitive capacity that knows what alternatives she is facing, evaluates them carefully, calculates the consequences and chooses the one – given her preferences – that she believes has the best consequences according to her. Weighing the different alternatives against each other, the actor makes a consistent optimizing choice and acts accordingly.

Besides the core assumptions the model also typically has a set of auxiliary assumptions that spatio-temporally specify the kind of social interaction between ‘rational’ actors that take place in the model. These assumptions can be seen as giving answers to questions such as: who are the actors and where and when do they act; which specific goals do they have; what are their interests; what kind of expectations do they have; what are their feasible actions; what kind of agreements (contracts) can they enter into; how much and what kind of information do they possess; and how do the actions of the different individuals interact with each other.

So, the base model basically consists of a general specification of what (axiomatically) constitutes optimizing rational agents and a more specific description of the kind of situations in which these rational actors act (making the auxiliary assumptions serve as a kind of restriction of the intended domain of application for the core assumptions and the deductively derived theorems). The list of assumptions can never be complete since there will always be unspecified background assumptions and some (often) silent omissions (usually based on some negligibility and applicability considerations). The hope, however, is that the ‘thin’ list of assumptions shall be sufficient to explain and predict ‘thick’ phenomena in the real, complex, world.

These models are not primarily constructed for being able to analyze individuals and their aspirations, motivations, interests, etc., but typically for analyzing social phenomena as a kind of equilibrium that emerges through the interaction between individuals.

Now, of course, no one takes the base model (and the models that build on it) as a good (or, even less, true) representation of reality (which would demand a high degree of appropriate conformity with the essential characteristics of the real phenomena, that, even when weighing in pragmatic aspects such as ‘purpose’ and ‘adequacy,’ it is hard to see that this ‘thin’ model could deliver). The model is typically seen as a kind of thought experimental ‘as if’ bench-mark device for enabling a rigorous mathematically tractable illustration of social interaction in an ideal-type model world, and to be able to compare that ‘ideal’ with reality. The ‘interpreted’ model is supposed to supply analytical and explanatory power, enabling us to detect and understand mechanisms and tendencies in what happens around us in real economies.

Based on the model – and on interpreting it as something more than a deductive-axiomatic system – predictions and explanations can be made and confronted with empirical data and what we think we know. The base model and its more or less tightly knit axiomatic core assumptions are used to set up further ‘as if’ models from which consistent and precise inferences are made. If the axiomatic premises are true, the conclusions necessarily follow. But if the models are to be relevant, we also have to argue that their precision and rigour still holds when they are applied to real-world situations. They often do not. When addressing real economies, the idealizations and abstractions necessary for the deductivist machinery to work simply do not hold.

If the real world is fuzzy, vague and indeterminate, then why should our models build upon a desire to describe it as precise and predictable? The logic of idealization, that permeates the base model, is a marvellous tool in mathematics and axiomatic-deductivist systems, but a poor guide for action in real-world systems, where concepts and entities are without clear boundaries and continually interact and overlap.

Being told that the model is rigorous and amenable to ‘successive approximations’ to reality is of little avail, especially when the law-like (nomological) core assumptions are highly questionable and extremely difficult to test. Being able to construct ‘thought-experiments’ depicting logical possibilities does not take us very far. An obvious problem with the mainstream base model is that it is formulated in such a way that it realiter is extremely difficult to empirically test and decisively ‘corroborate’ or ‘falsify.’

e201ada1b6To achieve explanatory success, a theory should, minimally, satisfy two criteria: it should have determinate implications for behavior, and the implied behavior should be what we actually observe. These are necessary conditions, not sufficient ones. Rational-choice theory often fails on both counts. The theory may be indeterminate, and people may be irrational …

I believe that much work in economics and political science that is inspired by rational-choice theory is devoid of any explanatory, aesthetic or mathematical interest, which means that it has no value at all. I cannot make a quantitative assessment of the proportion of work in leading journals that fall in this category, but I am confident that it represents waste on a staggering scale.

Jon Elster

Such models have — from an explanatory point of view — indeed no value at all. The ‘thinness’ is bought at too high a price unless you decide to leave the intended area of application unspecified or immunize your model by interpreting it as nothing more than two sets of assumptions making up a content-less theoretical system with no connection whatsoever to reality.

  1. Ikonoclast
    May 24, 2020 at 3:18 am

    Rational choice theory is an academic, ex-post rationalization of private property market relations. The public are little aware of this theory anyway. I don’t think rational choice theory is the fulcrum to use to overturn capitalist prescriptions in the public mind.

    It is better to debunk the myth of market efficiency and appeal to public ideas of human equality and ecological sustainability. Markets are supposed to allocate resources efficiently. This is the standard dogma. It is relatively easy to show that market allocations are highly inequitable, incomes are not related to productivity and resource allocations are not efficient nor sustainable in ecological terms.

    What has to be destroyed is blind faith in markets.

  2. Robert Locke
    May 24, 2020 at 8:38 am

    agreed, to be replaced with?

    • Robert Locke
      May 24, 2020 at 3:47 pm

      My answer: social democracy, which gives a voice to those who work in the economy to the distribution of the wealth it generates.

      • Craig
        May 24, 2020 at 10:07 pm

        In the last analysis Social democracy is only the other side of the orthodox present paradigmatic coin. Not that social democracy isn’t somewhat more workable and has ethical content superior to capitalist ideologies of any stripe. it does, but it doesn’t fulfill the thirdness greater oneness new pattern definition of a genuine paradigm change which is desparately needed, and it for sure doesn’t accomplish the personally immediate and continuous or the systemic broadness effects of a mega paradigm.

        We can wander for another millennia (or decades) in the obsessively contentious death throes of the capitalist-socialist dualism or we can integrate their truths in a way that changes everything. It’s our choice….or folly.

      • Robert Locke
        May 25, 2020 at 9:12 am

        ‘In the last analysis Social democracy is only the other side of the orthodox present paradigmatic coin’

        Craig, Read my chapter on “German Obstinancy.” in My Oxford University Press, The Collapse of the American Management Mystique, 1996,to find our how wrong your Anglo-American view is.

    • Ikonoclast
      May 24, 2020 at 11:44 pm

      I would say to be replaced with democratic socialism which is similar but maybe not the same as social democracy. There still remains the problem of our withdrawal from market relations. Market relations, backed by the laws of private property and rights to income, are the command and control mechanism(s) of our current system. People are educated, enculturated and indoctrinated to understand, if not always agree with, the rules of this system.

      It follows that a command and control system cannot be thrown out without a replacement system and without reeducation of the populace to understand the new system. I would advocate a progressive and phased reduction in the operation of markets. We would begin by reducing the number and type of legal market instruments in the financial markets. We would continue by removing market operations from natural monopolies and public goods, so mass transit, energy, communications and infrastructures would be moved wholly into the public sphere in phases. Health, education and welfare would also be moved, in phases, wholly into the public sphere.

      Next, laws favoring private businesses and corporations would be progressively repealed and instead laws favoring cooperative businesses introduced. This could take the form, for example, of progressively removing subsidies from private businesses and corporations and progressively giving subsidy assistance to genuine cooperative businesses.

      These are just a few examples. We would also need a UBI (Universal Basic Income), a JG (Job Guarantee), wealth taxes and finally wealth limit laws which prevent any individual from becoming too wealthy. A new personal worth 100 times greater than median personal worth could be a sensible limit.

  3. Edward Ross
    May 25, 2020 at 12:52 am

    I CERTAINLY agree with Lars syll’s reasoned dismissal of rational choice theory and some of the comments that followed.
    Fore example, Iconoclast’s “What has to be destroyed is blind faith in the markets.”
    Robert Locke’s reference to social democracy . Then Craig’s ” We can wander for another millenium (or decade in the obviously contentious death throes of the socialist dualism or we can integrate their truths in a way that changes everything . It is our choice—or folly.”

    My response to the above is collectively academia in general and particularly economics has to connect to real people in the real world, who are not determined to act in the manner prescribed by economists.

  4. Edward Ross
    May 25, 2020 at 1:09 am

    Somehow my response went before i had finished to put it bluntly, in my opinion and that of many ordinary thinking citizens many economists have become the slaves of the rich and powerful. To some extent this may not have been intentionable , but simply because they have become disconnected from the real world. Here one of the things i have learnt throughout my life is to never underestimate anyone’s ability to understand an explanation when it is given in a language that they are able to understand. Also never reject a concept or model of something before you understand why it broke. Otherwise you could be jumping out of the frying pan into the fire.TED

  5. May 25, 2020 at 12:17 pm

    Lots of interesting points here. Lars talks of ‘preference’, whereas everyone I know has lots of preferences in different fields, so the discussion should be of a set of preferences, and even that is unstable insofar as preferences become temporarily satisfied.

    Iconoclast says “What has to be destroyed is blind faith in markets”., and Robert responds with “Agreed, to be replaced with? Social democracy!” Ike prefers “democratic Socialism”, but Craig says neither satisfies “the thirdness greater oneness new pattern definition of a genuine paradigm change. … We can wander for another millennia (or decades) in the obsessively contentious death throes of the capitalist-socialist dualism or we can integrate their truths in a way that changes everything.”

    I take it Craig is contrasting the effects of oscillating between the two ends of a line with Hegel’s dialect synthesising a different type of position from a thesis (Capitalism) and its anti-thesis (Socialism), as when mankind learning how to fly transformed the operations of both of them. I see this; I don’t think Edward does.

    So Ike’s recipe for destroying “blind faith in markets” is to address the problem head on and
    progressively reduce market operations, starting (quite rightly) with some of those in the financial markets, and as an after thought, “a UBI (Universal Basic Income) [and] a JG (Job Guarantee)”. I’ve argued that individuals having more than adequate credit enables them to choose the job they can see needs doing, and recognising that money is created as Ponzi money while credit can only be given, not loaned, both nullifies any justification for financial markets and (given we already use credit cards and avoid paying interest on them), satisfies Ike’s re-educational requirement:

    Said Ike: “It follows that a command and control system cannot be thrown out without a replacement system and without reeducation of the populace to understand the new system”.

    A UBI supplied via credit card (Craig’s unconsidered third option) should satisfy both Craig and Ike. Using our own credit only as and when we need it satisfies my Distributist leanings.

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