Economic ‘Irrationality’ Versus Willful Ignorance

One of the problems with the rise of behavioral economics is that too often behavior is defined as irrational, the result of cognitive screwups. I’ve dealt with this issue before, but James Kwak convincingly argues that the BP oil disaster is not due to a cognitive failure to assess risk:

I have no doubt that it is true that people have problems estimating the chances of certain rare events.* But to stop there is to whitewash the sins of the companies and the executives who created these crises.
First, it doesn’t do to say that ordinary people are irrational in making ordinary everyday decisions, and therefore we have to accept that companies will be irrational in making big decisions — like, say, whether to drill holes in the Earth’s crust a mile under the ocean. As they say, people make big bucks to make these decisions, and we expect them to use a little more reasoning than the kind we evolved on the African grasslands.

I like me some snark, but this is the key point:

The problem isn’t that people have cognitive biases in assessing unlikely events. When you’re dealing with a big company like Citigroup or BP, you have many people applying lots of clever thinking to these problems. The problem is that there is a systematic bias within these companies against certain assessments and in favor of others. That is, the guy who shouts, “Danger! Danger!” will be ignored (or fired), and the guy who says, “Everything’s fine, the model says disaster can strike only happen once every hundred million years” will get the promotion — because the people in charge make more money listening to the latter guy. This is why banks don’t accidentally hold too much capital. It’s why oil companies don’t accidentally take too many safety precautions. The mistakes only go one way. You have executives assessing complex situations they don’t even begin to grasp and making the decisions that maximize their corporate and personal profits. (Is BP’s CEO going to give back years of bonuses now?)
…This isn’t inability to quantify the likelihood of unlikely events; this is willfully looking the other way.

As I put it:

People don’t suck more than they used to; instead, the side effects of being a shitty person have been eliminated, and the costs of not being a shitty person have risen.

To put it crudely (I do have a reputation to uphold), they’re not having brain farts, they’re just assholes.

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6 Responses to Economic ‘Irrationality’ Versus Willful Ignorance

  1. Greedy assholes.

  2. Paul Murray says:

    The solution is to actually start throwing people in prison. At the every least, they should be prohibited to hold directorships or any other trust.

  3. …this is the usual silly moralizing demonizing, name calling and dumness. Feels good to call other people dum though – don’t it.
    Their bad, bad evil, lazy, dum ppl..we’re not …we’re SPECIAL…suuuure…if only…
    ..few things:
    – behavior is by individuals driven by their, largely unconscious, impulses..grossly imperfect and subject to immediate needs and feel-good neurotransmitters
    – w/ 7B ppl +++, things have gotten a whole lot more complex and critical when mistakes happen…this will only accelerate…
    our, and all other animal brains are designed to react, not think and certainly not long-term..our brains crave simple, emotion-dense explanations of complex experience…
    ..thus name-calling and simple them=bad/me=good rhetoric feels real good…it neither helps describe/explain or for problem-solving the reality but what the heck…kill ’em, all!!

  4. Casey says:

    Yeah, if behavior weren’t influenced so much by greed…

  5. andrew says:

    I think the point, everyone, is that the risk-takers aren’t being irrational, but in fact they’re being quite rational. It’s just that their motives and the things they are willing to risk are not agreeable to the rest of us.
    I don’t believe it’s so much greed as a society-level psychopathy. But being so high in their skyscrapers, the things they “win” and “lose” affect numbers, not individuals; i.e. think along the lines of Stalin’s quote: “One death is a tragedy; one million is a statistic.”
    Furthermore, it comes down to priorities. The priority is to make as much money as possible, period. Rationally, the plan achieves this. Other priorities, e.g. the environment or public health, do not compare in power, and thus are not considered as strongly.
    I venture to say that different cognitive biases are in effect in quite a nuanced way; in particular the salience of different pressures. It’s not that decision makers fail to see risks because of an innate cognitive dysfunction, but the various risks are weighted differently due to priorities and social/environmental pressures. If the incentives to risk certain things are higher than those to not risk the same things, then it is rational to risk.
    The task, then, is to change the incentives, fix it so that decision-makers are behooved to not risk the things we don’t want them to risk.

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