Violations Of Rationality Research Articles

Internalism and Culpable Irrationality

AbstractAccording to internalism about rationality, the ir/rationality of a subject depends only on how things appear from her subjective perspective. According to culpabilism, rationality is a normative standard such that violations of rationality are (at least sometimes) blameworthy. According to a classical line of reasoning, culpabilism entails internalism. I argue that, to the contrary, culpabilism entails that internalism is false. The internalist cannot accommodate the possibility of culpable irrationality.

Behavioral implementation under incomplete information

We investigate implementation under incomplete information allowing for individuals' choices featuring violations of rationality. Our primitives are individuals' interim choices that do not have to satisfy the weak axiom of revealed preferences. In this setting, we provide necessary as well as sufficient conditions for behavioral implementation under incomplete information. We also introduce behavioral interim incentive Pareto efficiency and investigate its implementability under incomplete information.

Quantity-quality trade-off in the acquisition of token preference by capuchin monkeys (Sapajus spp.).

Money represents a cornerstone of human modern economies and how money emerged as a medium of exchange is a crucial question for social sciences. Although non-human primates have not developed monetary systems, they can estimate, combine and exchange tokens. Here, we evaluated quantity-quality trade-offs in token choices in tufted capuchin monkeys as a first step in the investigation of the generalizability of tokens as reinforcers, which is a potentially relevant factor underlying the emergence of money in humans. We measured capuchins' exchange preferences when they were repeatedly provided with 10 units of three token types yielding food combinations varying in quantity and quality. Overall, capuchins maximized their quantitative payoff, preferring tokens associated with a higher food amount, rather than showing violations of rationality. However, some individuals did not maximize their qualitative payoff, possibly because of conditional valuation effects or owing to the choice overload phenomenon, according to which too many options reduce the accuracy of choice. Our study supports the importance of comparative research to finely analyse the multiple components shaping the economic behaviours of other species, possibly to achieve a more comprehensive, evolutionary- and ecologically based understanding of human economic behaviour. This article is part of the theme issue 'Existence and prevalence of economic behaviours among non-human primates'.

Bounded rationality in C. elegans is explained by circuit-specific normalization in chemosensory pathways

Rational choice theory assumes optimality in decision-making. Violations of a basic axiom of economic rationality known as “Independence of Irrelevant Alternatives” (IIA) have been demonstrated in both humans and animals and could stem from common neuronal constraints. Here we develop tests for IIA in the nematode Caenorhabditis elegans, an animal with only 302 neurons, using olfactory chemotaxis assays. We find that in most cases C. elegans make rational decisions. However, by probing multiple neuronal architectures using various choice sets, we show that violations of rationality arise when the circuit of olfactory sensory neurons is asymmetric. We further show that genetic manipulations of the asymmetry between the AWC neurons can make the worm irrational. Last, a context-dependent normalization-based model of value coding and gain control explains how particular neuronal constraints on information coding give rise to irrationality. Thus, we demonstrate that bounded rationality could arise due to basic neuronal constraints.

Is Cognitive Impairment Related to Violations of Rationality? A Laboratory Alcohol Intoxication Study Testing Transitivity of Preference.

Alcohol intoxication is well known to impair a number of cognitive abilities required for sound decision making. We tested whether an intoxicating dose of alcohol altered whether individuals satisfied a basic property of rational decision making, transitivity of preference. Our study was within-subjects in design and our analysis teased apart stable, yet error-prone, preferences from variable, error-free preferences. We find that alcohol intoxication does not appear to play a major role in determining whether subjects violate transitivity. For a minority of individuals, we find that alcohol intoxication does impact how they select among and/or perceive lotteries with similar attribute values. This, in turn, can cause them to alter various aspects of their preference structure.

Dimensions of decision-making: An evidence-based classification of heuristics and biases

Traditionally, studies examining decision-making heuristics and biases (H&B) have focused on aggregate effects using between-subjects designs in order to demonstrate violations of rationality. Although H&B are often studied in isolation from others, emerging research has suggested that stable and reliable individual differences in rational thought exist, and similarity in performance across tasks are related, which may suggest an underlying phenotypic structure of decision-making skills. Though numerous theoretical and empirical classifications have been offered, results have been mixed. The current study aimed to clarify this research question. Participants (N = 289) completed a battery of 17 H&B tasks, assessed with a within-subjects design, that we selected based on a review of prior empirical and theoretical taxonomies. Exploratory and confirmatory analyses yielded a solution that suggested that these biases conform to a model composed of three dimensions: Mindware gaps, Valuation biases (i.e., Positive Illusions and Negativity effect), and Anchoring and Adjustment. We discuss these findings in relation to proposed taxonomies and existing studies on individual differences in decision-making.

When Irrational Biases Are Smart: A Fuzzy-Trace Theory of Complex Decision Making.

I take a decision-making approach to consider ways of addressing the “unresolved and dramatic problems in the world”. Traditional approaches to good decision-making are reviewed. These approaches reduce complex decisions to tradeoffs between magnitudes of probabilities, and outcomes in which the quantity and precision of information are key to making good decisions. I discuss a contrasting framework, called “fuzzy-trace theory”, which emphasizes understanding the simple gist of options and applying core social and moral values. Importantly, the tendency to rely on meaningful but simple gist increases from childhood to adulthood (or, in adulthood, as people gain experience in a domain), so that specific irrational biases grow with knowledge and experience. As predicted theoretically, these violations of rationality in the traditional sense are associated empirically with healthier and more adaptive outcomes. Thus, interventions that help decision makers understand the essential gist of their options and how it connects to core values are practical approaches to reducing “unresolved and dramatic problems in the world” one decision at a time.

Why Do Irrelevant Alternatives Matter? An fMRI-TMS Study of Context-Dependent Preferences.

Both humans and animals are known to exhibit a violation of rationality known as "decoy effect": introducing an irrelevant option (a decoy) can influence choices among other (relevant) options. Exactly how and why decoys trigger this effect is not known. It may be an example of fast heuristic decision-making, which is adaptive in natural environments, but may lead to biased choices in certain markets or experiments. We used fMRI and transcranial magnetic stimulation to investigate the neural underpinning of the decoy effect of both sexes. The left ventral striatum was more active when the chosen option dominated the decoy. This is consistent with the hypothesis that the presence of a decoy option influences the valuation of other options, making valuation context-dependent even when choices appear fully rational. Consistent with the idea that control is recruited to prevent heuristics from producing biased choices, the right inferior frontal gyrus, often implicated in inhibiting prepotent responses, connected more strongly with the striatum when subjects successfully overrode the decoy effect and made unbiased choices. This is further supported by our transcranial magnetic stimulation experiment: subjects whose right inferior frontal gyrus was temporarily disrupted made biased choices more often than a control group. Our results suggest that the neural basis of the decoy effect could be the context-dependent activation of the valuation area. But the differential connectivity from the frontal area may indicate how deliberate control monitors and corrects errors and biases in decision-making.SIGNIFICANCE STATEMENT Standard theories of rational decision-making assume context-independent valuations of available options. Motivated by the importance of this basic assumption, we used fMRI to study how the human brain assigns values to available options. We found activity in the valuation area to be consistent with the hypothesis that values depend on irrelevant aspects of the environment, even for subjects whose choices appear fully rational. Such context-dependent valuations may lead to biased decision-making. We further found differential connectivity from the frontal area to the valuation area depending on whether biases were successfully overcome. This suggests a mechanism for making rational choices despite the potential bias. Further support was obtained by a transcranial magnetic stimulation experiment, where subjects whose frontal control was temporarily disrupted made biased choices more often than a control group.

Violations of rational choice principles in pricing decisions

Research on behavioral and psychological aspects of pricing is concerned with violations of rationality. This paper presents a comprehensive overview of the current literature by highlighting those studies that have specific relevance for industrial pricing. I hereby examine two different perspectives. First, by taking the customer perspective, I analyze under which circumstances customer purchase decisions violate basic principles of rational choice. Second, by taking the perspective of managers, I examine which biases affect the process of price setting within firms. This overview meaningfully advances industrial pricing theory and practice: It allows both customers and managers to guard themselves against widely diffused traps in decision making. It also enables managers to favorably influence customer perceptions of value and price without actually changing the price. Finally, by pulling together a number of different research areas into a more parsimonious framework and a tighter narrative, this framework offers systematic directions for future research.

Starlings uphold principles of economic rationality for delay and probability of reward.

Rationality principles are the bedrock of normative theories of decision-making in biology and microeconomics, but whereas in microeconomics, consistent choice underlies the notion of utility; in biology, the assumption of consistent selective pressures justifies modelling decision mechanisms as if they were designed to maximize fitness. In either case, violations of consistency contradict expectations and attract theoretical interest. Reported violations of rationality in non-humans include intransitivity (i.e. circular preferences) and lack of independence of irrelevant alternatives (changes in relative preference between options when embedded in different choice sets), but the extent to which these observations truly represent breaches of rationality is debatable. We tested both principles with starlings (Sturnus vulgaris), training subjects either with five options differing in food delay (exp. 1) or with six options differing in reward probability (exp. 2), before letting them choose repeatedly one option out of several binary and trinary sets of options. The starlings conformed to economic rationality on both tests, showing strong stochastic transitivity and no violation of the independence principle. These results endorse the rational choice and optimality approaches used in behavioural ecology, and highlight the need for functional and mechanistic enquiring when apparent violations of such principles are observed.

Reason-based choice: A bargaining rationale for the attraction and compromise effects

Among the most important and robust violations of rationality are the attraction and the compromise effects. The compromise effect refers to the tendency of individuals to choose an intermediate option in a choice set, while the attraction effect refers to the tendency to choose an option that dominates some other options in the choice set. This paper argues that both effects may result from an individual’s attempt to overcome the difficulty of making a choice in the absence of a single criterion for ranking the options. Moreover, we propose to view the resolution of this choice problem as a cooperative solution to an intrapersonal bargaining problem among different selves of an individual, where each self represents a different criterion for choosing. We first identify a set of properties that characterize those choice correspondences that coincide with our bargaining solution, for some pair of preference relations. Second, we provide a revealed-preference foundation to our bargaining solution and characterize the extent to which these two preference relations can be uniquely identified. Alternatively, our analysis may be reinterpreted as a study of (interpersonal) bilateral bargaining over a finite set of options. In that case, our results provide a new characterization, as well as testable implications, of an ordinal bargaining solution that is previously discussed in the literature under the various names of fallback bargaining, unanimity compromise, Rawlsian arbitration rule, and Kant– Rawls social compromise.

Testing for Rationality with Consumption Data: Demographics and Heterogeneity

In this paper, we introduce a new measure of how close a set of choices are to satisfying the observable implications of rational choice, and apply it to a large balanced panel of household level consumption data. We use this method to answer three related questions: (i) How close are individual consumption choices to satisfying the model of utility maximization? (ii) Are there dierences in rationality between dierent demographic groups? (iii) Can choices be aggregated across individuals under the assumption of homogeneous preferences? Crucially, in answering these questions, we take into account the power of budget sets faced by each household to expose failures of rationality. To summarize our results we …nd that: (i) while observed violations of rationality are small in absolute terms, our households are only moderately more rational than the benchmark of random choice; (ii) there are signi…cant dierences in the rationality of dierent groups, with multi-head households more rational than single head households, and the youngest households more rational than middle age households; (iii) the assumption of homogenous preferences is strongly rejected: choice data that is aggregated across households exhibits high levels of irrationality.

Reward Value-Based Gain Control: Divisive Normalization in Parietal Cortex

The representation of value is a critical component of decision making. Rational choice theory assumes that options are assigned absolute values, independent of the value or existence of other alternatives. However, context-dependent choice behavior in both animals and humans violates this assumption, suggesting that biological decision processes rely on comparative evaluation. Here we show that neurons in the monkey lateral intraparietal cortex encode a relative form of saccadic value, explicitly dependent on the values of the other available alternatives. Analogous to extra-classical receptive field effects in visual cortex, this relative representation incorporates target values outside the response field and is observed in both stimulus-driven activity and baseline firing rates. This context-dependent modulation is precisely described by divisive normalization, indicating that this standard form of sensory gain control may be a general mechanism of cortical computation. Such normalization in decision circuits effectively implements an adaptive gain control for value coding and provides a possible mechanistic basis for behavioral context-dependent violations of rationality.

Emergence of group rationality from irrational individuals

Evolutionary theory predicts that animal decision makers should be rational, meaning that they consistently choose fitness-maximizing options. Despite this, violations of rationality have been found repeatedly in humans and other animals. The significance of these violations remains controversial, but many explanations point to cognitive limitations that prevent animals from adequately processing the information needed for fully rational choice. Instead, they rely on heuristics that usually work well but yield systematic errors in specific contexts. Although past research on rationality has focused on individuals, many highly integrated groups, such as ant colonies, regularly make consensus choices among food sources, nest sites, or other options. These collective choices emerge from local interactions among many group members, none of whom take on the whole burden of decision making. We hypothesized that groups may evade the irrational consequences of individual limitations by distributing their decision making across many group members. We tested this in the well-studied case of collective nest-site selection by Temnothorax ants. We found that individual ants, but not colonies, strongly violated rationality when presented with a challenging nest-site choice. Specifically, isolated individuals irrationally switched their preference between 2 alternative nest sites based on their experience of an unattractive decoy. Given the same choice, intact colonies maintained consistent preferences regardless of the decoy's presence. Previous studies have stressed how distributed decision making can filter out random errors made by group members. Our results show that collectives can also suppress systematic errors that emerge from the decision heuristics of cognitively limited individuals.

Irrational decision-making in an amoeboid organism: transitivity and context-dependent preferences

Most models of animal foraging and consumer choice assume that individuals make choices based on the absolute value of items and are therefore 'economically rational'. However, frequent violations of rationality by animals, including humans, suggest that animals use comparative valuation rules. Are comparative valuation strategies a consequence of the way brains process information, or are they an intrinsic feature of biological decision-making? Here, we examine the principles of rationality in an organism with radically different information-processing mechanisms: the brainless, unicellular, slime mould Physarum polycephalum. We offered P. polycephalum amoebas a choice between food options that varied in food quality and light exposure (P. polycephalum is photophobic). The use of an absolute valuation rule will lead to two properties: transitivity and independence of irrelevant alternatives (IIA). Transitivity is satisfied if preferences have a consistent, linear ordering, while IIA states that a decision maker's preference for an item should not change if the choice set is expanded. A violation of either of these principles suggests the use of comparative rather than absolute valuation rules. Physarum polycephalum satisfied transitivity by having linear preference rankings. However, P. polycephalum's preference for a focal alternative increased when a third, inferior quality option was added to the choice set, thus violating IIA and suggesting the use of a comparative valuation process. The discovery of comparative valuation rules in a unicellular organism suggests that comparative valuation rules are ubiquitous, if not universal, among biological decision makers.

Reason-Based Choice: A Bargaining Rationale for the Attraction and Compromise Effects

Among the most important and robust violations of rationality are the attraction and the compromise effects. The compromise effect refers to the tendency of individuals to choose an intermediate option in a choice set, while the attraction effect refers to the tendency to choose an option that dominates some other options in the choice set. This paper argues that both effects may result from an individual’s attempt to overcome the difficulty of making a choice in the absence of a single criterion for ranking the options. Moreover, we propose to view the resolution of this choice problem as a cooperative solution to an intra-personal bargaining problem among different selves of an individual, where each self represents a different criterion for choosing. We first identify a set of properties that characterize those choice correspondences that coincide with our bargaining solution, for some pair of preference relations. Second, we provide a revealed-preference foundation to our bargaining solution and characterize the extent to which these two preference relations can be uniquely identified. Alternatively, our analysis may be reinterpreted as a study of (inter-personal) bilateral bargaining over a finite set of options. In that case, our results provide a new characterization, as well as testable implications, of an ordinal bargaining solution that has been previously discussed in the literature under the various names of fallback bargaining, unanimity compromise, Rawlsian arbitration rule and Kant-Rawls social compromise.

A note on negativity bias and framing response asymmetry

An “unprocessed risk” is a collection of simple lotteries with a reduction-rule that describes the actual-payoff to the decision-maker as a function of realized lottery outcomes. Experiments reveal that the willingness to pay for unprocessed risks is consistently biased toward the payoff-level in the unprocessed representation. The “anchoring-to-frame” bias in cases of positive framing is significantly weaker than in cases of negative framing suggesting that rational “negativity bias” may reflect in asymmetric violations of rationality.

Was There a Bubble in Nasdaq? Information-Based Reexamination

There is not much doubt in the public mind that the dot-com boom on NASDAQ in the end of 90s represented a bubble. Indeed, major violations of rationality were observed. For instance, some dot-coms, which terminated their business still held positive market value. A market cap of the Internet companies, which sold airline tickets once was higher, than combined market capitalization of all airlines. However, academics are not so united in diagnosing the situation, which existed with hi-tech stocks at the turn of the century as the bubble, as well as the existence of asset pricing bubbles in principle (Siegel, 2003, Donaldson and Kamstra, 1996, Oftek and Richardson, 2003). Recently, Jarrow, Protter and Shimbo (2006-2007) developed a quantitative definition of a bubble. Unlike other studies of bubbles, which are based on analysis of the difference between fundamental(i.e. economically driven) price of the asset and its market price. However, fundamental price is notoriously difficult to predict. In my work, I propose alternative method of the study of the bubbles, which does not depend on a particular valuation model.

Beyond rationality: The content of preferences

The BDT literature has largely focused on demonstrations of violations of rationality (i.e. consistency) in individual decision making and has had little to say about the content of preferences. While researchers concluded that inconsistency implied preferences were constructed, some went so far as to presume that since preferences are constructed, substantive preferences do not exist prior to their revelation. In other words, they extended the findings that individuals do not always know exactly what they want to imply that consumer's do not have any substantive preferences. This clearly overstepped the bounds of the evidence, which was agnostic toward the existence of reasonably stable substantive preferences. We applaud Simonson for calling attention to this point. While we do not believe that Simonson's “inherent preferences” lead to preference orders that behave any more rationally or consistently than those studied in the BDT literature, we nevertheless join him in his call for further research into the content of preferences and make a variety of suggestions about where that research will bear most fruit.

Systematic mistakes are likely in bounded optimal decision-making systems

Systematic mistakes can be distinguished from other types of mistakes in that they are repeatable and predictable within a given organism, and are not due to uncertainty or lack of information. Here we provide a mathematical definition for the concept of systematic mistakes, which captures the way this concept has been used in the behavioral sciences. We also provide an analytical model of information processing networks that are made of large numbers of components, in analogy to the brain being made of a large number of neurons. We show that, for almost all behavioral tasks, and for a wide range of limitations on the computational complexity of the decision-making network, the best possible decision-makers will make systematic mistakes. This result, together with available empirical evidence, suggests that violations of rationality in humans and animals are consistent with natural selection, as the latter operates under constraints.