we need to cut 160 words as well as proof read An Epidemic of (Ir)rationality Ra
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we need to cut 160 words as well as proof read
An Epidemic of (Ir)rationality
Rationality is recognizing the truth behind the irrationalities of this world. After centuries of heuristic-induced rationality, only recently has behavioral economics unveiled the indeterministic ability of the market and its agents. The inefficiencies instigated by rationalities’ familiar friends – aversions, bias, and dissonance. Independent of whether you view yourself as altruistic or egoistic, a libertarian or authoritarian, a rational thinker or irrational thinker, irrational behavior encapsulates every inch of our lives through a simple application of the tragedy of the commons – to paraphrase Garret Hardin “Each man is locked into a system that compels him to maximize his utility — in a market where rationality is bounded individually and ceaseless collectively.”
The premises of rationality, individually and collectively, have been heavily scrutinized and challenged during the COVID-19 pandemic, when instinct and ‘animal spirits’ often dominate in decision-making. Effects of these instinctual indecisions lead to the instability of rationality that John Maynard Keynes had asserted through ‘animal spirits’ being “the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic.” Implications are vast and far-reaching as the lives and livelihoods of millions are jeopardized. However, every cloud has a silver lining and for COVID-19 it is the introduction to an unprecedented arena of microeconomic and macroeconomic responses worldwide allowing better analysis of the three core cogs of rationality behind the behavioral economic machine.
The first and largest cog of behavioral economics is the conception that holds rationality together – the structural component of the behavioral economic machine. It was termed ‘bounded rationality’ by Nobel laureate Herbert Simon as a notion that rationality was a limited construct precipitated by cognitive limitations and asymmetric information. The theory that our rational abilities are bounded by our own minds shone a light upon the flaws of the traditional rational choice theory.
Cognitive limitations can be further branched into many areas: two of which most renowned are cognitive bias (by researchers Amos Tversky and Daniel Kahneman in 1972) and cognitive dissonance (by Leon Festinger in 1957).
The first limitation, cognitive bias, is an array of behavioral responses to both self-perceived and preconceived notions of the world which often fails to reflect reality. For instance, in relevance to the current pandemic, political disposition and media outlets play a large role in influencing individuals’ perspectives on COVID-19 which often induces favorableness towards sources that fit their ideals, accredited towards the phenomenon of confirmation bias. Another applicability of cognitive bias within COVID-19 is the optimism bias of both governments and individuals. This idea derives from humans’ irrational view that adverse events are more likely to occur to others than themselves, thereby resulting in many countries’ dereliction of duty and insufficiency of precautionary measures: a further reinforcement of the irrationality behind individuals’ decision to outweigh realism with optimism.
The second limitation, cognitive dissonance, details how individuals neglect, debunk, or avoid new findings when it conflicts with current beliefs and attitudes. This is distinctly outlined through the negligence of COVID-19 consequences by many political leaders like that of Andrés Manuel López Obrador (incumbent president of Mexico) and Jair Bolsonaro (incumbent president of Brazil). Blinded by the ‘importance of liberty’, COVID-19 deaths have soared in those countries beyond ethically-acceptable numbers. The respective libertarian and skeptic of COVID-19 have both rejected the statistical dangers and scientific evidence presented to them to fit their own political stance (a repercussion of confirmation bias’ antithesis – Semmelweis reflex). So is the sacrifice of lives for others’ liberty and skepticism objectively rational? And does the subjectiveness of the rationality behind these decisions not immediately denote ethics and morality as irrefutable factors behind rationality?
Within all the social dilemma around the responses to COVID-19, one concealed behavioral economics issue has been persistently muffled globally – the use of masks. Considered one of humanities’ most effective weapons against the spread of COVID-19, it has simultaneously introduced a behavioral side-effect, commonly known as the ‘free-rider problem’. The rationality that the egoistic temperament of individuals results in many benefiting from communal welfare without any contributions themselves; this self-interested behavior, as well as negative externalities, thus depletes communal welfare when enough individuals follow the same egoistic mindset. This is notable in the case where individuals refuse to wear masks through either denouncing their effectiveness or exploiting the many other mask-users, similar to that of herd immunity. This disregard for others’ wellbeing is a sign of altruistic deficiency which precipitated the rapidly increasing number of cases and death – another example of individuals’ suboptimal decisions. Game theory is another profound factor within all the mask mayhem that presents another model of the irrationality behind individuals. With many in society viewing the utility gained through liberty without a mask being greater than that of the safety from wearing one, a subsequence of this has led to a strictly dominant strategy of abstaining from wearing masks (for simplification, assuming masks only protect others). This therefore fabricates a situation where the Nash equilibrium is not pareto optimal, reflecting off how egoistic rationality can instigate irrational and suboptimal outcomes.
The second essential cog of behavioral economics concerns the major innate components at play within rationality both individually and collectively – the mechanism of the behavioral economic machine. The inertia of individual decision-making is the aftermath of two major actors within rationality: prospect theory (by Amos Tversky and Daniel Kahneman in 1979) and status quo bias (by William Samuelson and Richard Zeckhauser in 1988). Collectively, a significant dichotomy of rationality is presented through the theories of herd behavior (first popularized by William Trotter in 1914) and irrational exuberance (by Alan Greenspan in 1996, later popularized by Robert J. Shiller in 2000).
While statistical observation should logically influence rationality, prospect theory disproved this by referencing the aversions of human nature, particularly when saving lives during a pandemic are involved. This led to the imposition of broad draconian restrictions and lockdowns. Whilst many lives were saved, many livelihood were lost. This is largely due to the loss aversion, the tendency of individuals to prefer outcomes with low uncertainty of absolute loss to those with high uncertainty of potential loss. Complimenting individuals’ aversion rationale, status quo bias is another pivotal tool that is related to the inertia of decisions within society. It is due to the cognitive limitations of bounded rationality that cause individuals to stick to choices that worked in the past as it is often a safer and more convenient decision. This unprogressive behavior substantiates the irrationality induced by anchoring on initial suboptimal decisions.
The collective impact on rationality is a different story as herd behavior propels the idea that individuals are guided by group rationale. This is displayed through the somewhat absurd craze of hoarding toilet paper during the pandemic. Had society finally reached the peak of irrationality? Perhaps. Or was it just the incidental overvaluing of toilet paper? Irrational exuberance is to blame for this phenomena. Wasted resources, time and money are only subtle complications compared to accidentally stumbling into a toilet paper filled room.
Last but not least, the third cog of behavioral economics dictates the rationality of decisions as a result of external influences – the control component of the behavioral economic machine. In an attempt to correct or to exploit the market inefficiencies derived from irrationality, firms and government often utilize the nudge theory (brought into prominence by Richard H. Thaler and Cass Sunstein’s book on nudge in 2008). Nudge theory is a simplistic, yet effective form of behavioral economics that capitalizes on positive reinforcement and minute prompts. It has been implemented in multitudes throughout COVID-19 to maintain hygiene and keep social distancing. Examples of nudge application are boundless varying from parks in Denmark creating markings in the grass to signal distances from other groups to simply installing mirrors over the handwashing stations, leading to a 62% increase in handwashing behavior. Positively-reinforced nudging aids in transiting human rationality from a more unconscious to conscious state, reducing individual cognitive limitations for a greater social wellbeing.
In a world of social media dominance, the COVID-19 pandemic has presented asymmetric information to the society, causing confusion and fear. With disinformation and information overload, it is often harder to distinguish fact from opinions or truth from fake news than making a decision itself. As such, rationality is ambiguous and an approximation at best. The “infodemic” exacerbates cognitive biases, fuels farcical conspiracy theories, and inhibits rational freedom, eventually forcing individuals into a state of blinded belief. Hence, better communication and transparency from the government and international agents are essential to regaining public trust – key not only to fight the prevailing pandemic, but also to establish new social norms post-covid. Alternatively, the Coase theorem presents a private market solution to mitigate asymmetric information and externalities, assuming clear outline of property rights and liabilities.
No matter where your mind travels, the behavioral economic machine travels with it. The limits of rationality, constraints of behavioral inertia and conscious cues all act as stepping stones towards taming the suboptimalities that prevail during pandemics. The post-covid world standing as a fertile ground – with big data and technological advancements – will offer a global laboratory for studies of behavioral economics, especially in rationality and decision-making. With government voices superseding individual decisions in certain regions and individuals speaking louder than ever in others, COVID-19 is bound to change our perspective on rationality. The familiar rationality of the bounds of each cog is slowly being replaced by the progression of behavior analysis into becoming homo economicus – the state characterized by the ceaseless ability to make rational decisions. So for the “rational” individual reading this, which components of the behavioral economic machine details the rationality behind the appeal of the Latin ‘homo economicus’ over the English ‘economic man’?