12 Interpreting Deviations from Rational Choice Theory
We have argued that rational decision-makers form preferences over lotteries that satisfy not only the core axioms of Transitivity and Completeness but also the Independence Axiom. However, empirical research reveals that many people deviate from these principles, particularly in experiments like the Allais and Ellsberg paradoxes. These deviations challenge the descriptive accuracy of expected utility theory and raise important questions about the nature of rationality and decision-making. How should we interpret these findings? What insights do they provide into human decision-making?
Observing deviations from expected utility theory in experiments like the Allais and Ellsberg paradoxes raises the question of whether these deviations are relevant to our understanding of rational choice. This issue brings into focus the classic distinction between normative and descriptive perspectives in decision theory.
On one hand, the fact that many people reason incorrectly about probabilities or deviate from expected utility theory does not necessarily mean that the theory itself is flawed (a point consistent with Hume’s Law: is does not imply ought). Such deviations might simply indicate that individuals are prone to errors or biases. In fact, this perspective underscores the value of studying rational choice theory: it provides a benchmark for rational reasoning that can be taught, with the potential to improve decision-making skills.
On the other hand, normative theories must also adhere to the principle that ought implies can. If we claim that people should follow expected utility theory, it must be practically possible for them to do so. If cognitive limitations prevent people from consistently applying expected utility theory, this raises concerns about the theory’s normative adequacy.
The key question, then, is whether people can consistently follow expected utility theory. If they cannot, under what circumstances do they fail, and what are the underlying reasons? Understanding the limitations of human reasoning and pinpointing the situations where deviations are most common can provide valuable insights, potentially leading to refinements in both normative and descriptive decision theories.
Whenever we observe behavior that seems to violate an axiom of expected utility theory, like the Independence Axiom, we can interpret this deviation in one of three ways:
Genuine Violations of the Axioms: One interpretation is that the decision-maker’s preferences genuinely conflict with an axiom of expected utility theory. If this is the case, it suggests that expected utility theory may not fully capture how individuals make decisions under uncertainty, pointing to the need for alternative models that better reflect actual behavior or offer principles that are more applicable or easier for people to satisfy.
Changing Preferences: Another possibility is that the decision-maker’s preferences may shift during the course of an experiment. Factors such as fatigue, changes in emotional state, or other external influences can cause these fluctuations. In this case, what seems to be a violation of an axiom like the Independence Axiom might not indicate a genuine conflict with expected utility theory but rather a simple change in preference, reflecting temporal inconsistency rather than a fundamental deviation from rational decision-making principles.
Contextual Factors: Finally, a deviation might occur because the experimenter has overlooked relevant features of the decision context that influence preferences. Factors such as framing effects, the way information is presented, or social influences can lead individuals to make choices that seem inconsistent with expected utility theory. If these contextual influences were taken into account, the observed deviations might actually be consistent with rational decision-making principles.
The observed deviations from expected utility theory in the Allais and Ellsberg paradoxes raise questions about whether preferences are stable and how the decision-making context influences the perception of outcomes.