Unbounded Rationality & Its Consequences
We should know that we can't know it all. Yet the results of using the opposite idea, of "unbounded rationality,” are widely influential (usually farcically mixed with asymmetrically applied “unintended consequences”). Here's why neither sports nor markets need "less regulation":
Jag Bhalla is an entrepreneur, inventor and writer. His current project is Errors We Live By, a series of short exoteric essays exposing errors in the big ideas running our lives, details at www.errorsweliveby.com. His last book was I'm Not Hanging Noodles On Your Ears, a surreptitious science gift book from National Geographic Books, details at www.hangingnoodles.com. That explains his twitter handle @hangingnoodles.
It should not be news that we can’t know it all (ignorance is unavoidable). But the results of using the opposite notion, of “unbounded rationality,” remain influential, often bizarrely mixed with asymmetrically applied ideas about “unintended consequences.”
1. “Unbounded rationality” is built into many economic models (which are deemed to confer near “sacredness” on free market results). For example decisions are assumed to meet demanding standards of “completeness.” Sadly models incorporating “bounded rationality” (our cognitive and data limits) are harder and hence used limitedly).
2. Hayek said "all political theories assume...that most individuals are very ignorant," adding that everyone inevitably suffers some ignorance (information incompleteness). Hayek reasoned that although we each can only have limited data, that collectively is more information than any central planning could have, so “spontaneous order” is better.
3. Markets = data processing systems: But Hayek’s spontaneous order ignores cases needing nondispersible data (see 9 below). Free markets only process one kind of data in one way (hardwired reflex responses to prices varying one-dimensionally, up or down). That’s like having no central nervous system, or calculating with only one kind of data and no CPU.
5. Regulation “risks all sorts of unintended consequences.” True, but in nonstatic conditions, so does inaction. And free market “invisible handers” depend on its unintended effects (typically miscast as always benign).
6. “Permissionless innovation” promoters risk structural non-science-ness. Its “free-market think tank” developer has openly declared biases in its assumptions and goals (pre-assuming freer markets are better). Physical (reality refereed) sciences aren’t precommitted to particular assumptions or results, only to rigorous bias balancing processes.
7. Seeking less regulation is often just make-my-life-easier whining. All businesses should want good regulation, and dislike bad regulation. That distinction matters. Rules and referees are required to ensure fairness and safety in sports—and markets.
8. Can we trust the mindless coordination of markets to handle the future’s "voyage into the unknown”? What if some element of central steering, or guidance, or intelligent nonlocal adjustment, is needed? Perhaps that’s why central nervous systems evolved. They can beat distributed reflex-only systems.
9. Markets solve many problems well. But not all (e.g., Darwin’s Wedges, or where externalities lower costs for all transactors). Without guidance/regulation markets do only one kind of coordination: “deciding” via incomplete prices and often imprudentcustomer choices (like a mass tug-of-war with millions of players pulling on separate ropes).
Central guidance/steering isn’t “central planning” (both Hayek and Adam Smith saw this). It’s more like steering a ship and regularly adjusting to changing conditions and observed effects). We must use what is foreseeable to prepare prudently for what isn’t.
Illustration by Julia Suits, The New Yorker cartoonist & author of The Extraordinary Catalog of Peculiar Inventions
Giving our solar system a "slap in the face."
- A stream of galactic debris is hurtling at us, pulling dark matter along with it
- It's traveling so quickly it's been described as a hurricane of dark matter
- Scientists are excited to set their particle detectors at the onslffaught
The climate change we're witnessing is more dramatic than we might think.
A lazy buzz phrase – 'Is this the new normal?' – has been doing the rounds as extreme climate events have been piling up over the past year. To which the riposte should be: it's worse than that – we're on the road to even more frequent, more extreme events than we saw this year.
Once again, our circadian rhythm points the way.
- Seven individuals were locked inside a windowless, internetless room for 37 days.
- While at rest, they burned 130 more calories at 5 p.m. than at 5 a.m.
- Morning time again shown not to be the best time to eat.
SMARTER FASTER trademarks owned by The Big Think, Inc. All rights reserved.