Tom_Talbot comments on Rationality Quotes August 2011 - Less Wrong

3 Post author: dvasya 02 August 2011 08:24PM

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Comment author: Tom_Talbot 02 August 2011 11:43:36PM *  13 points [-]

Suppose we know someone's objective and also know that half the time that person correctly figures out how to achieve it and half the time he acts at random. Since there is generally only one right way of doing things (or perhaps a few) but very many wrong ways, the "rational" behavior can be predicted but the "irrational" behavior cannot. If we predict the person's behavior on the assumption that he is rational, we will be right half the time. If we assume he is irrational, we will almost never be right, since we still have to guess which irrational thing he will do. We are better off assuming he is rational and recognizing that we will sometimes be wrong. To put the argument more generally, the tendency to be rational is the consistent (and hence predictable) element in human behavior. The only alternative to assuming rationality (other than giving up and assuming that human behavior cannot be understood and predicted) would be a theory of irrational behavior - a theory that told us not only that someone would not always do the rational thing but also which particular irrational thing he would do. So far as I know, no satisfactory theory of that sort exists.

David Friedman, Price Theory, An Intermediate Text

Comment author: cousin_it 03 August 2011 12:09:44AM *  27 points [-]

This sounds wrong. Biases have predictable direction, that's why they're called biases and not variance (ahem).

Comment author: Tom_Talbot 03 August 2011 12:23:17AM *  4 points [-]

Friedman continues, but I shortened the quote to make it punchier. Essentially he says that, (1) given a large number of individuals irrationality will average out in the aggregate, (2) In most cases that an economist would be interested in (eg. investors, CEOs) the individuals have been selected to be good at the task they are performing, i.e. not irrational in that domain.

Comment author: Unnamed 03 August 2011 09:13:41PM 12 points [-]

In some contexts it makes sense to talk about errors in opposite directions canceling out but in others it does not as errors only accumulate. Suppose one person overestimates how much they'll enjoy having an iPad and buys one when they'd be better off without one, and another person underestimates how much they'll enjoy having an iPad and doesn't buy one when they'd be better off with one. Looking at the total number of iPads sold, these errors cancel out. But looking at total human welfare, the errors just add up - two people are each less happy than they could be, which is doubly bad. Similarly, if one person gets too much medical care and another gets too little, then they both lose, one from being overtreated and the other from being undertreated.

If you look at the market as a means of aggregating information (as in prediction markets) then errors can cancel out, but when you evaluate the market as a means of distributing products to people then errors just accumulate.

Comment author: wedrifid 03 August 2011 09:54:26AM 7 points [-]

Friedman continues, but I shortened the quote to make it punchier. Essentially he says that, (1) given a large number of individuals irrationality will average out in the aggregate,

This is the part that sounds (and is) wrong. It would perhaps be correct if it was "given a large number of individuals selected from mind space via a carefully crafted distribution of deviations about some mind the irrationality will average out in the aggregate". The irrationality of a large number of human individuals will not average out.

Comment author: majus 03 August 2011 07:30:35PM 1 point [-]

This seems to be an argument about definitions. To me, Friedman's "average out" means a measurable change in a consistent direction, e.g. significant numbers of random individuals investing in gold. So, given some agents acting in random directions mixed with other agents acting in the same (rational) direction, you can safely ignore the random ones. (He argued.) I don't think he meant to imply that in the aggregate people are rational. But even in the simplified problem-space in which it appears to make sense, Friedman's basic conclusion, that markets are rational (or 'efficient'), has been largely abandoned since the mid 1980s. Reality is more complex.

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