1. The Rational Actor Model after the Behavioral Economics Revolution
Herbert Gintis
Santa Fe Institute
April 2015

2. Disarray of the Behavioral Sciences
The behavioral sciences (economics, sociology, anthropology, psychology, political science, biology) are in profound disarray, with incompatible models of human behavior.
We now have the analytical and empirical basis for beginning to construct an integrated behavioral science.
An integrated array of behavioral science disciplines will have a deep effect on social policy, including development policy.

3. Four Incompatible Models of Human Decision-making
Economics: Homo economicus, the self-regarding actor.
Sociology: Homo socialis, the malleable prosocial actor.
Biology: Homo zoologos, the selfish kin fitness maximizer.
Psychology: Homo paralogos: the systematically irrational decision-maker.

4. Four Incompatible Models of Human Decision-making
At least three of these four models must be wrong.
In fact they are all wrong,
although all include fundamental insights that must be incorporated into a unified basic model of human choice and strategic interaction.

5. Principles for the Unification of the Behavioral Sciences
Gene-culture Coevolution (biology, psychology, anthropology)
The Rational Actor Model (economics, biology)
Theory of Social Norms (sociology, social psychology)
Game Theory (economics, biology)
Complexity Theory (physics, biology)

7. Moral Sentiments and
Material Interests
(MIT 2005)

8. The Bounds of Reason
(Princeton 2009)

9. A Cooperative Species
(Princeton 2011)

10. The Rational Actor Model
A rational actor’s behavior can be modeled as maximizing a preference function subject to beliefs and constraints (informational and material).
The conditions under which this model holds are extremely general and plausible (Savage, 1954).
But the model is purely formal, and is compatible with an immense range of behaviors.

11. The Rational Actor Model
Assumptions of the rational actor model (Savage 1954):
Choice Consistency: if an agent prefers A to B and prefers B to C, then the agent must prefer A to C.
Choice Completeness: Given any two choices A and B, the agent either prefers A to B, or prefers B to A, or is indifferent between A and B.
Bayesian Logic: In dealing with uncertainty, the agent applies the laws of probability.
When these three principles hold, the agent’s choices can be modeled as the maximization of a preference function subject to constraints.

12. The Rational Actor Model
There are very few known exceptions to choice consistency or completeness, and no known exceptions to Bayesian logic
except in humans.
In humans we must say: In dealing with uncertainty, the agent applies what he believes to be the laws of probability.

13. The Rational Actor Model
Critiques of this general model of rational choice are ubiquitous, but they are usually ill-founded.
The rationality postulate is simply a radical reduction in the size of the set of choice behaviors that need be analyzed.
Suppose we observe an individual making pairwise choices from a set of 10 choices.
The number of choice pairs is then 10 x 9/2 = 45, so there are 245 = 35,184,372,088,832 distinct choice patterns.
However, the consistency axiom allows only 10 x 9 x … x 1 = 3,620,800 choice patterns (about one 10 millionth of the number of possible choice pairs).

14. The Rational Actor Model
Behavioral economics makes no sense without the rational actor model.
Behavioral economics is based on laboratory and field experiments;
Experiments are designed and interpreted according to game theory;
Game theoretical results presuppose that players are maximizing some preference function;
i.e., players are rational.

15. The Rational Actor Model
The rational actor model suggests that understanding behavior consists in
specifying preference functions
and modeling the social factors that determine them.
The success of economic theory has depended largely on its successful deployment of the rational actor model in explaining economic, and more generally, social behavior.

16. The Rational Actor Model
Behavioral economics findings often appear to conflict with the rational actor model.
Sometimes they do.
But generally they do not.
Behavioral findings conflict with how this model has been traditionally interpreted in standard economic theory.
Behavioral economics is generally an insightful enrichment and elaboration of the rational actor model
that quite powerfully undermines its traditional interpretation.
Behavioral economics is a set of important empirical findings, but it is not a theory.
It is not an alternative to the rational actor model.

17. The Rational Actor Model
The rational actor model does not say that rational agents
are selfish;
actually maximize;
are instrumentally rational;
have costless information processing capabilities;
are amoral and emotionless;
act in their best interest;
prefer their own preferences to any other set of preferences.

18. The Rational Actor Model
Hence the following behaviors are not irrational:
Giving to charity;
Making habitual choices without reflection;
Using heuristics;
Ignoring lots of information when making choices;
Smoking, obesity, unsafe sex, drug addiction;
Weak will-power, procrastination.

19. Behavioral Additions to the
Rational Actor Model
Principle I: Preferences are state and social context dependent;
State dependence:
Prospect theory (Kahneman and Tversky 1979) asserts that decisions are based on gains and losses from the agent’s current position.
If you are hungry or scared, your preferences will reflect this situation.
If you are reminded of your inferior social position, your task performance may deteriorate.

20. Behavioral Additions to the
Rational Actor Model
Principle I: Preferences are state and social context dependent;
Social Context Dependence:
Calling a game the “Wall Street Game” lead people to play differently that calling it the “Community Cooperation Game.”
Choices in market interactions usually are very different from choices in face-to-face interactions.

21. Behavioral Additions to the
Rational Actor Model
Adding the relevant current state of the actor to the choice model often renders preferences consistent.
Hyperbolic discounting (Herrnstein, Ainsley, Laibson) becomes consistent by expanding the choice space to include the current time in the choice bundle.
Prospect theory becomes consistent if the choice bundle includes the status quo point.
Regret theory (Loomis, Sugden) becomes consistent if you include the foregone choice as well as the taken choice.

22. Behavioral Additions to the
Rational Actor Model
Principle II: Beliefs reflect the agent’s location in a social network of minds over which cognition is distributed.
This principle is stressed in the work of anthropologists and sociobiologists, including Robin Dunbar, Michael Tomasello, and their coworkers.
Networked minds and distributed cognition make modeling decision making very difficult,
but network theory is rapidly advancing.

23. Behavioral Additions to the
Rational Actor Model
Principle III: The probability an agent attaches to a possible event can depend on how much the agent likes or dislikes the outcome.
This is called wishful thinking.
For instance, if people hold particular social views, they may reject evidence counter to their views rather than changing their views. This is called confirmation bias.
A more general form of this principle is: rationality does not imply that subjective probabilities equal objective probabilities.

24. Behavioral Additions to the
Rational Actor Model
In fact, however, when sufficient counter-information accumulates, people do often change their views.
Global warming;
Same-sex marriage.
Belief updating can be a socially rational process, but is rarely an individual, socially isolated process.
In an open society with an educated populace, rational updating is often achieved.

25. Experimental Evidence Questioning the Rational Actor Model
Optical illusions are important for understanding vision:

26. Experimental Evidence Questioning the Rational Actor Model
but they do not show that vision is deeply flawed.

27. Experimental Evidence Questioning the Rational Actor Model
Optical illusions show that the incredibly complex heuristics the brain uses to draw information from visual stimuli are not 100% accurate.

28. Experimental Evidence Questioning the Rational Actor Model
Similarly, experimentally validated instances of incorrect decision-theoretic judgment are important for understanding judgmental heuristics,
but they do not show that human judgment is in any general sense “irrational.”

29. The Rationality of Moral Behavior
Humans have other-regarding preferences:
Preference functions often include the well-being of other individuals.
But human prosocial behavior cannot be reduced to other-regarding preferences.
People value moral behavior for its own sake.

30. Character Virtues
Character virtues are ethically desirable behaviors that individuals value for their own sake.
The character virtues include honesty, loyalty, trustworthiness, fairness, considerateness, etc.
These character virtues operate without concern for the individuals with whom one interacts: one is honest because it is the right way to behave.
Character virtues are not absolutes. If the cost of honesty is sufficiently high, most individuals will behave dishonestly.

31. Character Virtues: Honesty
In Gneezy (2005), subjects pair off, and the first of the pair, Bob, is shown two options.
Option A, pays 5 to Bob and 6 to his partner Alice. Option B reverses the payoffs.
Bob sees the payoffs to the two options but Alice does not.
Alice chooses the option, after hearing Bob’s advice (which she is free to ignore).
Alice is told that one of the options is better for Bob, and the other is better for her.

32. Character Virtues: Honesty
Bob is permitted to send either of the following two messages to Alice:
“Option A will earn you more money than option B” or
“Option B will earn you more money than option A.”
Gneezy found that 83% of Bobs told the truth.
and 78% of Alices believed Bob’s message.
The Bobs expect their advice to be taken.
As the cost to Bob of being honest increases, the probability that Bob will lie goes up as well.

33. Unraveling of Cooperation
Policy Implications:
Unraveling of Cooperation
Many people behave morally no matter what others do.
However, most people will abandon a moral stance when the cost is sufficiently high.
More important, many moral individuals will abandon ethical principles if there is a high frequency of selfish behavior. This is the unraveling of cooperation.
Effective social policy depends on the upstanding behavior of the many, but protects against the unraveling of cooperation by consistent enforcement.

34. Policy Implications: Status Quo Bias
With incomplete information concerning the alternatives, people tend to stick with what they have.
This is called status quo bias.
This idea is developed brilliantly by Cass Sunstein and Richard Thaler’s in their recent book Nudge.
For example, in the United States, the default condition with respect to organ donation is "no donation," whereas in France, the default condition is "donation.”
Consequently, the rate of organ donation is France is several times higher than it is in the United states.

35. The Ethical Basis of Democracy
Policy Implications:
The Ethical Basis of Democracy
One vote cannot alter the outcome of an election.
Therefore voters are altruistic, not self-interested.
A self-interested voter will not vote his self-interest.
A self-interested individual will never bother to become politically knowledgeable.
Hence political democracy is a vast morality play.
Without properly altruistic citizens, the system could not work.

36. The Ethical Basis of Democracy
Policy Implications:
The Ethical Basis of Democracy
Herrmann, Thöni, Gächter, Science, 2008.
Public goods game with punishment with subject pools in fifteen countries with varying social characteristics.
The phenomenon they studied was anti-social punishment:
Some free-riders, when punished, responded not by increasing their contribution, but rather by punishing the high contributors!
The result, of course, is a sharp decline in the level of cooperation for the whole group.

37. The Ethical Basis of Democracy
Policy Implications:
The Ethical Basis of Democracy

38. The Ethical Basis of Democracy
Policy Implications:
The Ethical Basis of Democracy

39. Fostering Integrity in Business
Policy Implications:
Fostering Integrity in Business
Reciprocity as a Contract Enforcement Device (Fehr, Gächter and Kirchsteiger, Econometrica 1997)
In a contractual situation in which third-party enforcement cannot cover all contractual details, agents who value integrity and trust can write contracts that are superior to fully third-party enforceable contracts.

40. Fostering Integrity in Business
Policy Implications:
Fostering Integrity in Business
Experimental design:
Subjects divided into ‘firms’ and ‘workers’
Firms offer contracts (w, e*, f ) where w is the wage
offered, e* is the effort expected in return, and f is
the fine if the worker is detected shirking.
Workers (randomly ordered) accept one of the
remaining offers.
Worker with contract (w, e*, f ) chooses effort e.
With probability s (0 < s < 1), a worker who shirks
(meaning e < e*) is detected (by a third party) and
is fined f.

41. Fostering Integrity in Business
Policy Implications:
Fostering Integrity in Business
Firm profits are q e – w, increasing in e and worker
payoff is w – c(e) decreasing in effort e.
The fine f and the probability of detection s are
given by the experimenter.
Firm observes its profit, and hence knows e.
Firm can then elect to multiply the worker’s payoff
by a factor of p (1 ≤ p ≤ 2), absorbing the cost as
a deduction from his profit.
The game is now over (one-shot).

42. Fostering Integrity in Business
Policy Implications:
Fostering Integrity in Business
If all self-regarding and all subjects know this fact:
No firm will offer the reward.
A worker will choose effort e = 0 or e = e*.
Other predictions depend on worker risk-aversion.
If f and s are low, e = 0, w = 0, so zero payoffs.
If all strong reciprocators and all subjects know this fact:
Firms may offer reward p > 1 if e > e*.
Workers may choose effort e > e*.
Both firms and workers may be better off than
in the self-regarding case.

43. Conclusion
The concept of rationality used in economics is very weak. It does not include selfishness or prudence.
Humans are not basically irrational, although they make mistakes in dealing with complex issues (e.g., the base rate fallacy).
Humans have strong other-regarding (prosocial) preferences and value such character virtues as honesty and courage.
Humans are strong reciprocators: they reward prosocial and punish antisocial behavior even when they cannot gain personally therefrom.