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Tips on How and Why We Choose: Decision Science, Rational Choice Theory, and Hurricane Dorian

 

 

 

 

A Self-Improvement, Self-Awareness, and Applied Game Theory Newsletter.

Helping you become more self-aware, intuitive, effective, efficient, precise, productive, honest, and successful through decision-science and rational-choice theory

What is the meaning of life, and how can you use decision-science to not only survive but prosper

 

 

Q. Lewis, I was researching how people make choices in bad situations as in the arrival of Hurricane Dorian. Why and how do people choose to stay or leave their homes?

A. This is going to get a little complex but I will explain it as simply as I can. The more emotionally balanced we are and the clearer our thinking, the more likely we are to have common sense. The definition of common sense is pretty simple. It is a basic ability to perceive, understand, and judge things, which is shared by nearly all people and can be reasonably expected of nearly all people in a specific situation and without any need for debate. This is what I like to call a “highly functional reality”.

Many experts in the art and science of decision making have seen great value in describing and organizing common sense systematically. From this exploration has come a concept known as “rational choice theory*” (rational action theory). This concept offers a template for understanding and often formally modeling social and economic behavior.  The basic concept of rational choice theory is that group social behavior results from the behavior of individuals (actors), each of whom is making their individual choices. Thus, the theory is concerned with the factors that motivate individual choices (methodological individualism).

 

 

 

 

 

Rational choice theory assumes that an individual has preferences among the various available choices and has the freedom and ability to state which option is preferred. These preferences are assumed to be complete (the person can always say which of two alternatives they consider preferable or that neither is preferred to the other) and transitive (if option A is preferred over option B and option B is preferred over option C, then A is preferred over C). “

The rational agent (player or strategist) is assumed to take account of available information, probabilities of events, and potential costs and benefits in determining preferences, and to act consistently in choosing the self-determined best choice of action. A more in-depth exploration of this concept can be found by studying The Ellsberg Paradox. This is a paradox in decision theory in which people’s choices violate the postulates of subjective expected utility  the attractiveness of an economic opportunity as perceived by a decision-maker in the presence of risk.  It is generally taken to be evidence for ambiguity aversion– a preference for known risks over unknown risks. As I mentioned earlier when discussing “rational choice” the ambiguity averse individual would rather choose an alternative where the probability distribution of the outcomes is known over one where the probabilities are unknown. The Ellsberg paradox was popularized by Daniel Ellsberg (born April 7, 1931) who made a choice in his own life that on some level affected the course of history. Daniel Ellsberg is an activist and former United States military analyst who, while employed by the RAND Corporation, precipitated a national political controversy in 1971 when he decided to release the Pentagon Papers, a top-secret Pentagon study of U.S. government decision-making in relation to the Vietnam War, to The New York Times and other newspapers.

The irony of this important decision was that Ellsberg completed a PhD in Economics from Harvard University in 1962. His dissertation on decision theory was based on a set of thought experiments that showed that decisions under conditions of uncertainty or ambiguity generally may not be consistent with well-defined subjective probabilities. Now known as the Ellsberg paradox this formed the basis of a large literature that has developed since the 1980s concerning decision science, including more complex approaches such as approaches such as Choquet expected utility and info-gap decision theory.

Ellsberg was charged under the Espionage Act of 1917 along with other charges of theft and conspiracy, carrying a total maximum sentence of 115 years. Due to governmental misconduct and illegal evidence gathering, and the effective defense by his attorneys, all charges against Ellsberg were dismissed on May 11, 1973.

Ellsberg was awarded the Right Livelihood Award in 2006. He is also known for having formulated an important example in decision theory, the Ellsberg paradox. Though a version of his theory was noted considerably earlier by John Maynard Keynes, Ellsburg brought new perspectives to the concept.

The basic idea of the Ellsberg paradox is that people overwhelmingly prefer taking on risk in situations where they know specific odds rather than an alternative risk scenario in which the odds are completely ambiguous—they will always choose a known probability of winning over an unknown probability of winning even if the known probability is low and the unknown probability could be a guarantee of winning. That is, given a choice of risks to take (such as bets), people “prefer the devil they know” rather than assuming a risk where odds are difficult or impossible to calculate.

 

 

 

 

All of these various ideas on effective choosing are based on “Rationality” a widely used assumption of the behavior of individuals in the part of economics concerned with single factors and the effects of individual decisions (microeconomic models.)

Virtually all functional decision-making problem solving, political science, sociology, philosophy, and game-based strategic thinking is based on the idea that the decision-makers involved are thinking rationally. A particular form of rationality is “instrumental rationality”, which involves seeking the most cost-effective means to achieve a specific goal without reflecting on the worthiness of that goal. Gary Becker, the Nobel Prize-winning economist, was an early proponent of applying rational actor models more widely.

Rational choice theory presents ideas on rationality in a form of specialized language, thus, the rationality here is quite narrow as opposed to the colloquial and most philosophical use of the word “rational” which typically means “sensible”, “predictable”, or “in a thoughtful, clear-headed manner.” In Rational choice theory, the definition of rationality is presented at its most basic level.  Behavior is rational if it is goal-oriented, reflective (evaluative), and consistent (across time and different choice situations). This contrasts with behavior that is random, impulsive, conditioned or adopted by (un-evaluative) imitation.

Ordinary thinkers often assume that individuals make consumption choices so as to maximize their happiness or receive some desirable and useful benefits. Extraordinary thinkers only focus their rational choice on a set of specific axioms that need to be satisfied, without any specification of where the goal (preferences, desires) comes from. This form of rationality mandates a consistent ranking of the alternatives. Individuals choose the best action according to their personal preferences and the constraints facing them. e.g., there is nothing irrational in preferring fish to meet the first time, but there is something irrational in preferring fish to meat in one instant and preferring fish to meat in another, without anything else having changed. Rational choice theorists do not claim that the theory describes the choice process, but rather that it predicts the outcome and pattern of choices.

An assumption often added to the rational choice paradigm is that individual preferences are self-interested. Such an individual can act to balance costs against benefits to arrive at actions that maximize personal advantage. Even proponents of such models, do not claim that a model’s assumptions are an accurate description of reality, only that they help formulate clear and falsifiable hypotheses.

For them, the only way to judge the success of a hypothesis is through empirical tests. Of course, without specifying the individual’s goal or preferences it may not be possible to empirically test, or falsify, the rationality assumption, in which case rational choice theory becomes true by definition (a tautology). However, the predictions made by a specific version of the theory are testable.

One should not necessarily accept rational choice theory as the best or most accurate approach to decision making. In recent years, the most prevalent version of rational choice theory, Expected Utility Theory*, has been challenged by many behavioral economists. Economists are integrating many ideas from other disciplines including psychology and sociology and are enriching their theories of choice in order to get a more accurate view of human decision-making. Much of this comes down to wants and needs.

Still, Rational Choice Theory has become increasingly useful in addressing patterns of decision making in many social sciences other than just economics. This includes political science especially in the study of interest groups, elections, behavior in legislatures, and bureaucracies.

Question:

How rational are most of your choices?  Are your choices goal-oriented, reflective (evaluative), and consistent or are you more intuitive behaving randomly, and impulsively?

 

Recommended Movie:

Double Indemnity:  This 1944 noir film is about Rational choice theory*.  Rational choice theory is one of the most dependable explanations of criminal behavior, the rational individual making a calculated choice to engage in crime. It visually demonstrates the cost-benefit analysis of crime. Here is the trailer.

 

 

 

 

 

 

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