Friday, July 24, 2009

Rational Outcomes through Irrational Behaviour

There's been a considerable amount of research into behavioural economics, and I find it ironic that the results often seem to be the same - that no matter how messed up the players are, markets seem to find their way. William Easterly delves into a book by Vernon Smith on that subject and notes that we aren't as crazy as we might think:

Societies develop NOT through the conscious design of some experts (Smith uses the horrible jargon “constructivist” for the design view), but through the “ecological” survival of institutions, norms, rules, firms, and products in a society of freely choosing individuals.

[...] So players are behaving “irrationally,” yet Smith points out that they have managed to get a better outcome than what “rational” behavior would achieve. He argues that players have unconscious social norms of “fair” behavior (and also they may find ways of “socially” signaling to each other these norms, since one thing we know about humans is that their social skills are highly advanced). Unconscious sociability allows humans to realize gains from social exchange that cannot be captured by the explicit “rational decision” model. He finds more evidence for this idea by subtle variations in the social context of the experiment.

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