L2: Building blocks: rationality and preferences

RC based on two main assumptions

• methodological individualism

• Rational behavior (utility maximization)

Methodological individualism

• Individual theory —> interest in individual decision making

• The unit of analysis is the individual person

  • Even group actions, such as protests, are explained by the actions of individuals

• This stands in contrast to theories that take the "group" as the unit of analysis

  • Examples of theories that focus on group

    • Realism (states)

    • Liberalism (states)

• The focus of RC is on individuals and individual actions

Methodological individualism: how analyze groups?

• For example, we understand an organization by explaining the behavior of its leaders, of its members, of its consumers, of its shareholders, etc.

  • Individuals decide, the organization does not!

• Society:

  • Society is the sum of individuals

  • Society does not shape individuals, individuals are shaped independently of the social structure

    • Contrast to constructivism

• Every analysis must begin with the individuals, deal with individual choices and experiences, with collectives formed as aggregates

  • Bottom-up analysis

Rationality: case of Hussein (former president of Iraq)

• He killed many people because he believed they were traitors

• Personally shot members of his cabinet

• Used gas to kill the Kurds living in Iraq

• Killed many family members and journalists

• Many people argue that he was "irrational"

• However, this term can have several connotations:

  • "not the best way to get what you want"

  • "crazy"

  • "I would do something else"

  • "Unpredictable"

  • "not brilliant" or "not all-knowing"

Rationality: case of Russia invasion 2022

• Is Putin sane? Is he rational?

• He used disproportional measures against Ukrainian civilians

• Many opposition members disappeared, and many protests are suppressed

• Some people argue have argued that he is "irrational"

• Former Secretary of Defense & CIA director Robert Gates commented in a CNN interview that Putin has "gone off the rails."

• RC: Perpetuating their own rule at any cost or risk of nuclear war is insensible to everyone else but sometimes rational:

Rationality

• individuals have goals and desires

• Individuals act in accordance with those goals and desires

Preferences

individuals wants (goals/desires)

Where do preferences come from?

Survival, reproduction, socially acquired…?

RC does not care where they come from and why people want certain things

• Rationality does not have any moral standing/judgment

Do preferences change?

Don’t change much, especially in the short run

Criticism: self interest vs selfish

• If an individual has preferences and act in accordance to these preferences, we call the individual rational and self-interested

  • Note: rationality is directly related to the individuals action!

• People pursue what they find important i.e., they pursue their preferences

• Preferences can of course include empathy for family and friends, animals, environment, ...

  • Your preferences do not have to only be connected/related to you

• Self-interest does not automatically mean selfish!

  • You brush your teeth. It is certainly in your self interest to do so (and your friends and family too) but brushing your teeth is NOT selfish

Thin version of rationality

we do not make any assumptions about an individuals goal. We only know she/he has goals

Thick version of rationality

we make more explicit assumptions about the goals of individuals

• Ex. The goal of political party is to get into the gov

i

Term that denotes the individual

X, y, z

denotes the preferences that an individual has

x Pi y

means individual i prefers option x to y

P means > (greater than)

P = Prefer

x li y

means individual i is indifferent between option x and y

I means = (equal to)

| = Indifferent

x Pi y li z

• Individual i prefers option x over y but is indifferent between the options y and z

Rationality in formal terms

• An individual i is rational if s/he makes a choice between the outcomes that is in line with his or her preferences

  • Choose the outcome that is MOST preferred

• A choice is rational if the object chosen is better as any other available objects according to the chooser's preferences

• A choice is rational if the object chosen is as good as any other available objects according to the chooser's preferences

Preference ordering

they can say which outcome they prefer

What assumptions are needed in order to order your preferences?

1. Comparability/completeness

2. Transitivity

Comparability/completeness

A rational choice must be complete

• All alternatives in the choice set must be comparable in terms of preferences

• The outcomes are comparable if, for any pair of them, you can indicate whether you prefer the first to the second, or the second to the first or if you are indifferent between them

• Suppose you have two choices {x, y};

  • To be complete, you must be able to tell: x Pi y or y Pi x or x li y

Transitivity

• A strict preference relation is said to be transitive if for any of the three (can be more) possibilities:

  • x Piy, y Pi z, x Pi z

• If I prefer x over y and y over z, then I should (if I am rational) prefer x over z

  • Your preference follow your ordering all the way through → You prefer choice 1 over choice 2 and choice 3

• An indifferent relationship is transitive if:

  • x li y, y li z, x li z

Problems with completeness

if the comparison does not make sense for the individual

• If the individual does not always see options as competing alternatives

• Comparing apples to oranges

 

Problems with transitivity

• it requires consistency

• It gets complicated when

  • Stakes are very low

  • Uncertainty is high

example of completeness violation

• Imagine you go to the AH XXL to buy some products

• You rank all goods that are available

• You have all the time in the world, and you will be
  honest(!)

• After the first round, you need to do it again

• We will certainty discover some inconsistencies

• Completeness requires serious reflection on one own's preferences!

  • It might be caused by other factors (you made a mistake or you changed your preferences) but the simpler explanation is that you simply do not have a complete preference ordering over all goods

Example of transitivity violation

• Imagine you prefer: one tablespoon of sugar in your coffee over no sugar in your coffee

• 1000 grains Pi 0 grains

• Problem: you can not distinguish the effect of each additional grain of sugar i.e., the stakes are very low

  • Indifferent between 0 and 1 grain bc you cannot taste the difference

• the problem?

  • You should be indifferent between 0 and 1000 grains bc you do not taste the difference according to transitivity but you do actually notice a difference

Choice set

the preferences available to you

Exercise: What is the rational choice? What party will she vote for is her preference drops out?

Lab Pi CD

Lab Pi Lib

CD Ii Lib

She will vote for Lab

If they drop out she will vote for either Lib or CD bc she is indifferent

Exercise: individual votes labor, is this rational?

Lab Pi CD

CD Pi Lib

No

• Assumed completeness

  • That she prefers Lab over Lib

Note: need to see all of the levels being ordered

• 3 options means 3 comparisons for it the be complete

Exercise: individual votes for labor, is this rational?

Lab Pi CD

CD Pi Lib

Lib Pi Lab

No

• It’s not transitive

Individuals decision is rational if…?

• His or her preference order is complete and transitive

• The individual chooses the most preferred alternative available (i.e., the individuals maximizes)

• Note that the goals of the individual is not included in the definition of rationality

• Rational decision involves cost-benefit calculations

Irrationality

• An irrational individual will not choose the instrument/action he/she believes will lead to the most preferred outcome

• Or... an irrational individual will not have a coherent preference ordering and, therefore will not be able to choose their most preferred alternative

• Or... an irrational individual may behave recklessly and not calculate the costs and benefits of their actions