Fear Factor

The Illusion of rational man, enter the economics of fear; by W.A Wijewardena, is a great read.

He offers a simple look into a basically intrinsic assumption in economic theory, that of the existence of the rational man. Rational man as we all practically know, is a figment of the collective imagination. Everything thinks they are rational, but our rationality is also based on our emotions. So we are bringing in our emotions in the consideration of choices and decisions.

But are emotions completely devoid of rationality? Aren't emotions signals from the gut so to speak?

The problem may lie with the basic definition of economic rationality. The Economic man or the Rationl man is generally described to be one who pursues self interest in his actions decisions and thoughts, therefore exercising that self interest and furthering his improvement is a product of his rational mind. As Adam Smith says in the Wealth of Nations

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."

Mr. Wijewardena goes on to state that as fear is avoided by rational man due to the fact that it creates 'disutility' (the opposite of utility, which Rational Man is said to pursue) and due to the fact that it is a product of risk (or the fear of the unknown) it is irrational and 'does not tally with the concept of the rational man'.

His argument, if i am correct, is that fear is an irrational emotion and therefore should not fit in to the concept of the rational man.

But here, i feel that we are stuck in the orginal economic definition of 'rational man'. Where the original concept of rationality is one of reason. So does reasoning secificaly have to take place based only on known facts and figures? If man did that, ignoring his gut feeling and emotions, he would surely fall prey to the unknown. Calling gut instincts or emotions a part of 'rationality' or reasoning may seem absurd but in reality, that is exactly how reasoning takes place.

Man is a rational creature, meaning that man engages in reasoning. But trying to label that reasoning within narrow categories that cannot include emotions or any of the other tools that economists feel are not 'rational' as they see it will only lead to problems later on.

As for Mr. Wijewardena's argument that fear is irrational, it is irrational in the context of the 'old' rational man. The man meant to purely base his decisions on 'fact and reason'.

But fear does have its benefits. Fear is a signal and will only improve your ability to respond to events more accurately. But fear can also be irrational, when you are obviously more content to blindly fear things and adopt remedies to counter these fears without stopping to examine if these fears have any credibility. Like fearing antagonism in the job market just cos your skin is a darker shade.

This is a scary prospect and as MR Wijewardena says, has been present in society for a long time and is especially present in the 'era of fear' that we are living in.


Deane said...

I'd recommend the Logic of Life .

As a side note, no good economist really argues that man is always and everywhere rational being. The question you must ask is whether treating as if man was rational being produces good-enough results and an accurate-enough way of seeing and understanding things. For the most part, the answer is yes.

Most criticisms of rational choice theory (I'm not saying you are doing this) is a failure to understand what an economic model is.

The earth is not exactly a round object. But treating as if it were, is good enough for most purposes.

Same with rational-choice theory.

TheWhacksteR said...

First of all im sorry for taking so long to reply!

Well yes you're right rational man is sufficient for most macro level analyses.

But as we get more and more micro in terms of what we look at and look at trends that influence behaviour this concept will need to be re-looked at. Just like the earth i guess.

I'll check out the logic of life. thanks..