Five ways in which “irrationality” can be rational.
One early Saturday morning a few months ago, I went for a jog with Luka. On our way back from the park, we noticed a £20 note stuck on the pavement (it had been raining earlier). Luka’s eagle eye had spotted it even before I did – for a seven-year-old, 20 quid is a tidy sum. He had clearly not yet heard the old economists’ joke (Two economists walk down the street, and there, in front of them on the pavement lies a $20 note. As one of them bends down to pick it up, the other one says, “Oh, I wouldn’t bother if I were you.” “Why not?” “If it was genuine, someone would already have taken it.”), and stopped abruptly to quickly peel it off the pavement.
Few people would disagree that Luka was being rational: interrupting the jog and the effort of bending down were a negligible effort compared to the monetary gain. When the cost of a transaction is outweighed by the benefit, it is not only worthwhile, it is more worthwhile than doing nothing. But is foregoing an action that would make us better off (or taking an action that makes us worse off) always irrational? Posing the question is answering it! Here are five examples.
1. Costs and benefits out of balance. The first one was inspired by Twitter owner Elon Musk’s latest impulsive decision: at the end of June he decided that the number of tweets that can be read in a day would be limited to 600 (later apparently increased to 1,000) for non-paying users (subscribers paying the monthly fee of £11 could read ten times as much). I use Twitter a lot. My carefully curated feed is a source of high-quality knowledge in my domain of activity, and as a non-paying user, I have been enjoying this for free for many years. If, before Twitter existed, I could have got for just £11 what it gives me now, I would have bought it at once. So, considering that I read around 1000 tweets per day, should I become a paying subscriber to avoid hitting that limit? Rationally speaking, yes: the total value outweighs the total cost, and so, at first sight, not doing so would be irrational. But wait. Right now, I am receiving all this value for nothing. So my choice is not between (a) no Twitter, and (b) Twitter for £11 per month, but between (a) Twitter for free with a 1000 tweets per day limit, and (b) Twitter for £11 per month with an additional 9,000 tweets per day. The total value of both options (b) may be the same, but the starting point is different, and the extra value I get for the amountI am supposedly willing to pay in the second case is minimal. (Another example: imagine you’re prepared to pay £25,000 for a medium-sized family car, with a good selection of options, including a panoramic sunroof, but that you find you can buy the same car without the sunroof for £4,000 less. It is perfectly rational to judge the cheaper car as better value for money and that, while the sunroof is cool, it is not worth the extra money.) In general, while a bundle of benefits may be worth the total cost, it is quite possible that unbundling them reveals that some benefits are not worth their specific cost, thus establishing there is a smaller bundle that provides superior value for money. On second thoughts, all perfectly rational.
2. Non-product related judgement. One of behavioural scientist Richard Thaler’s classic thought experiments examines willingness to pay (WTP) for a cold beer on a beach on a hot summer day. The median price participants were prepared to pay was $2.65 (this was 1985!) if it was bought from a fancy hotel, but just $1.50 if it came from a run-down grocery store. Since the thought experiment determined that the beer was to be consumed on the beach, the value provided was exactly the same, regardless of the supplier. Is not being prepared to pay the higher price, even if the beer originates from the grocery store, irrational? At first sight, yes – if the experienced value is the same, then so should the WTP be. But we do not operate ignoring the context. Many people would accept the posh hotel can justify the higher price because of its higher costs; if the grocery store charged the same price, it would be plain profiteering, though. People object to that and would rather buy nothing. So, on second thoughts, people often overlay economic decisions with their personal conditions of purchase, and are willing to make sacrifices to meet them. Nothing irrational about that.
3. Non-market related pricing. Ina 1986 paper co-authored by Thaler, another classic thought experiment makes an appearance: is it fair to sell snow shovels, normally on sale at $15, for $20 the morning after a large snowstorm? In efficient markets, price, supply and demand are in a tight relationship, and in case of scarcity, an increase in the price ensures that the goods go to the people who value them most. Yet, sellers will often leave the price unchanged, and hence not only contribute to a suboptimal allocation of resources, but more puzzlingly, forego the opportunity to increase their profit. Irrational? At first sight, for sure. But the shop owners realize they will need to continue to do business in their town long after the windfall of a big snowfall. Would they, for the sake of a few extra bucks, be wise to acquire a reputation for chasing extra profits at the expense of their customers? On second thoughts, that would be neither well-considered, nor rational.
4. Costly punishment. A favourite instrument among social science researchers is the Ultimatum Game, in which the first player (the proposer) receives a sum of money, to be shared with the second player (the responder). The proposer offers a certain share to the responder, who can either accept it, in which case the money is split accordingly, or reject it, in which case neither gets anything. According to rational choice theory, as even the smallest amount is a gain, the responder should always accept. Yet in practice, offers lower than 25-30% are mostly rejected. This is not just the case for the token amounts usually at stake in laboratory experiments: in research by Steffen Andersen and colleagues in India, between one quarter and one third of responders rejected an offer of 30% of an average month’s wage. Forgoing seven days’ wages appears seriously irrational at first sight. However, most people not only have an innate sense of fairness and justice, but are also prepared to engage in costly punishment of those who act unfairly. This characteristic helps reinforce important social norms, and is thus evolutionarily adaptive. As a real-life illustration, consider a divorce settlement, in which one party proposes a certain split of the assets. If the other party rejects it, they must go to court, and because of the legal costs, both may end up with less than with an amicable settlement. Can it be rational not to let your ex get away with short changing you, even if it costs you money as well, in the end? On second thoughts, sure: justice has a price worth paying.
5. Self-harm. Imagine there are two bakers in town, one that is on the same side as you on the political spectrum, and the other at the far opposite end. If their products are of the same quality, and sold at the same price, would you be indifferent to where you bought your bread, pastries and pies? Many people would prefer to spend their money with the copartisan baker, rather than with their political opponent. Acting according to one’s preferences is by no means irrational, quite the opposite. But what if one baker’s loaves and buns are not only a lot better but also a lot cheaper… and it’s the wrong one!? At that point, sticking with your political ally and paying more for inferior goods would seem to be a prima facie case of irrationality – cutting off your nose to spite your face. But on second thoughts, if we accept that a preference is perfectly rational when price and quality are the same, then we should acknowledge that a certain willingness to make a sacrifice is rational too. The magnitude of that sacrifice depends on how strong the feelings of political affiliation of animosity are. So, choosing to eat second-rate, expensive sandwiches may well be rational for an ardent zealot.
Rationality is not always a matter of simple costs and benefits – it is often also a matter of what we truly value. If we do not know what someone else truly values and we conveniently substitute our own views, who is being irrational?
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