Rational Choice [Hardcover]

Itzhak Gilboa is one of my favorite economists. His book with David Schmeidler, A Theory of Case-Based Decisions (Cambridge: Cambridge University Press, 2001) is path breaking in amending the traditional Savage "small world" model of rational choice to be more realistic and useful. Rational Choice aims to present rational choice theory for newcomers without social scientific, philosophical, or mathematical expertise. Despite is diminutive size, the book ends up as a broadly accurate description of the current state of rational choice theory.

Gilboa is well aware of the limitations of standard the rational actor model, and makes no attempt in this book to go beyond this model (despite his own brilliant work on "case-based choice theory"). Rather, he considers the model as a "paradigm" rather than a "theory." The paradigm gives us a useful way of looking at the world, although by no means the only pertinent way. Gilboa urges the reader to add rational choice theory to his repertoire of tools used to assess social policy.

Rational Choice claims to be a "rigorous, concise, and nontechnical introduction to some of the fundamental insights of rational choice theory." (from the cover) Rational choice theory is well-suited for a concise nontechnical treatment, which this book is, but far from being rigorous, Gilboa is often simply incorrect, and rarely is convincing. The book appears to be directed to the layman with innate but inchoate prejudices against rational choice theory, but I doubt that such an individual will find this volume convincing.

Most opposition to rational choice theory that I have encountered, even when offered by professional behavioral scientists, is in fact couched in vague often even and ignorant terms. But there is a real critique of the theory. Gilboa simply doesn't locate it. For instance, Chapter 8 on Free Markets presents a very realistic objection to free markets and globalization in which the defender of market equilibrium, using the First Welfare Theorem, is completely incapable of even making a dent in the critics' arguments, and storms off in an angry huff. Gilboa's problem is twofold. First, the only plausible argument for free markets is dynamic and based on the innovative implications of competition and not on the First Welfare Theorem. In fact, as Arnold Harberger showed many years ago, the welfare losses of protection are generally quite small. Second, this issue has nothing to do with rational choice. Free markets have some desirable static allocational properties if agents make choices that are consistent with their welfare. Rational choice, as has been evident at least since Gary Becker's study of addiction and contemporary models of obesity, has no clear connection to making choices consonant with personal welfare.

Gilboa offers an indefensible definition of rationality. Spurning the traditional consistency definition of Savage (1954) and others, Gilboa offers the following: "a mode of behavior is rational for a given person if this person feels comfortable with it, and is not embarrassed by it even when it is analyzed for him." (p.5) The problem with this definition is that it has no analytical implications at all, and it deals with normative choice theory, not behavioral. If we add some ancillary assumptions, such as "a person will be embarrassed to find that his choices are inconsistent," then we restore the traditional definition of rationality. Why then this roundabout definition, couched in terms of the persuasive power of the author and presuming a high level of cognitive functioning of the rational agent? Gilboa argues that "An irrational mode of behavior is one that I can hope to change by talking to the decision maker, by explaining the theory to him, and so forth." (p. 5) Bringing the authors motives into the analysis, it appears, only confuses the issue even more. In the rest of the book, Gilboa does stick to the traditional definition of rationality, but he never explains why.

In Chapter 2, Gilboa tries to explain why a young lady, Ann, ignorant of rational choice theory, could improve her ability to solve her problem of choosing among boyfriends by applying rational choice theory. He quite fails to convince. Indeed, I cannot imagine why knowledge of rational choice theory could help Ann make such a decision.

Gilboa also treats very breezily some issues that merit lengthy argumentation and many examples. For instance, he treats base rate bias and conditional probabilities with a single example and biased samples with another single simple example. There is little chance a novice with appreciate the importance of these issues. They are easily explained with simple arithmentic and elementary probability theory.

Perhaps the most egregious failure of this book is to deal in any consistent way with empirical studies of human behavior in the context of strategic interaction. Instead, Gilboa gives off-hand observations about daily life that insult the critical faculties of the reader. Indeed, Gilboa's mode of argumentation makes understanding empirical studies conceptually impossible. For instance, it is well known that many individuals prefer to cooperate in a prisoner's dilemma, provided that they have some assurance that their partners will cooperate as well. Indeed, this finding is one of the more striking regularities in behavioral game theory. For Gilboa, however, the game payoffs should "incorporate any relevant payoffs---material, psychological, sociological and so forth." (p. 96) By not defining the game by its material payoffs, Gilboa assures that no experimentation at all is possible. One cannot set up a prisoner's dilemma and investigate the behavior of the subjects, because by definition, rational subjects must defect. If they do not, then the game is not a prisoner's dilemma. Indeed, different players may be playing altogether different games according to Gilboa's methodology! By constrast with Gilboa, experimental methodology requires defining a game by its material payoffs, and investigating the subjects' possible non-self-regarding preferences by studying the way they play in a common, objective, frame of reference.

Similarly, Gilboa explains the public goods game without reference to the empirical literature on the subject. I find this treatment completely unacceptable. If Gilboa does not know this empirical literature, he should find out about it and transmit it to his readers, if he pretends to be rigorous. Or perhaps he believes that the evidence not a part of rigorous analysis. If so, he is mistaken.

Gilboa's discussion of altruism is also breezy, perfunctory, and quite lacking in rigor or understanding of the literature. For instance, he assumes without discussion that (p. 98) that altruistic giving involves having the welfare of the recipient in one's utility function, showing no recognition of the work of Andreoni and others on warm-glow altruism, or of other conceptions of other-regarding behavior.

Spurning the considerable literature on group size and cooperation in the public goods game, Gilboa asserts that cooperation is more likely in small groups, giving the example of driving in the suburbs as opposed to the city. This sort of reasoning is quite unscientific, and likely leads the reader to value unscientific reasoning.

Gilboa attempts to present the notion of Nash equilibrium and critique it in just two or three pages. This does not give the concept its due. At least twenty pages are required to draw out the implications of the Nash criterion with any rigor, and this can be done with only elementary arithmetic and some logic. He then introduces rationalizability without a single example, and common knowledge of rationality without any critical treatment. Another twenty pages of non-mathematical yet rigorous analysis could clarify these concepts, but they are not present in this book. He similarly mentions "Nash equilibrium in beliefs" in one short paragraph, the chance of being understood by the layman being zero. He similarly presents backward induction in one page, with no examples, and no critical commentary.

In sum, Gilboa appears incapable of distinguishing between nonmathematical analysis and careless analysis, perhaps on the grounds that readers who do not understand mathematical argumentation are necessarily careless thinkers. They are not. This book is full of careless and perfunctory analysis and might appeal to careless thinkers. Few others will approve.

Professor Gilboa says in the Introduction, "The purpose of this book is to introduce readers to some of the fundamental insights of rational choice theory, drawing upon the formal theories of microeconomics, decision, games, and social choice as well as upon ideas developed in philosophy, psychology, and sociology. I believe that economic theory and its fellow disciplines have provided a remarkable collection of powerful models and general insights, which change the way we think about everyday life. At the same time, economics has been justifiably criticized on several grounds. First economics is a mathematically oriented field that in many situations fails to provide accurate numerical predictions as do the exact sciences. Second, the basic assumptions of economics have come under attack and have been shown to falsifiable in experimental studies. Finally, economics is often criticized for failing to deal with important and deep issues such as happiness and well-being, justice and fairness. Moreover, the scientific or pseudo-scientific approach to economics has been argued to be serving the rhetoric of capitalism in a way that may be detrimental to well-being and to justice. The focus of this book is on some basic insights that survive these critiques." The books contents are as follows:
I. Optimization: 1. Feasibility and Desirability, 2. Utility Maximization, 3. Constrained Optimization
II. Risk and Uncertainty: 4. Expected Utility, 5. Probability and Statistics
III. Group Choices: 6. Aggregation of Preferences, 7. Games and Equilibria, 8. Free Markets
IV. Rationality and Emotions: 9. Evolutionary View of Emotions, 10. Utility and Well-Being

I came to this book after having read many books in the inter-related areas of logic, economics, game theory, decision making, consciousness, etc. (e.g.: Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions, Freakonomics: A Rogue Economist Explores the Hidden Side of Everything (P.S.), Thinking, Fast and Slow, SuperCooperators: Altruism, Evolution, and Why We Need Each Other to Succeed, The Fair Society: The Science of Human Nature and the Pursuit of Social Justice, Being Logical: A Guide to Good Thinking, Your Brain Is (Almost) Perfect: How We Make Decisions, The Happiness Hypothesis: Finding Modern Truth in Ancient Wisdom.). I really enjoyed this book for several reasons, but primarily because of Professor Gilboa's definition of "rationality." He states, "I have a personal preference for a different [from the normal view of rationality as defined by economists] definition of rationality, which is much more subjective. According to this definition, a mode of behavior is rational for a given person if this person feels comfortable with it, and is not embarrassed by it, even when it is analyzed for him... The reason I like this peculiar definition of rationality is that I find it useful. An irrational mode of behavior is one that I can hope to change by talking to the decision maker, by explaining the theory to him, and so forth. A rational mode of behavior is one that is likely to remain in the data despite my teaching and preaching. I prefer to think of rationality as a notion of stability, or coherence of the decision with the decision maker's personal standards, rather than as a medal of honor bestowed upon certain decision makers by decision theorists." Amen.

Furthermore, I found the inclusion of the section entitled, "Rationality and Emotions" very helpful. Here Gilboa says, "To conclude, we do not seem to have good measures of happiness. Moreover, it is far from obvious that "we know it when we see it." By contrast, we have a much better idea of what misery is. One possible conclusion, in line with the position of John Rawls, is that social policies should focus on the minimization of misery rather than on the maximization of happiness." Lastly, Gilboa states that, "The rational choice paradigm provides a way of thinking about the world, but it does not provide answers to a multitude of concrete questions. Throughout this book we have encountered questions that arise in the social sciences and that lead us to traditional questions in philosophy. Problems that range from the definition of probability to the meaning of happiness, from the notion of rationality to essence of justice, belong to the realm of philosophy, but they pop up in practical guises in questions of the social sciences. Most of these philosophical questions do not have objective or scientific answers. Correspondingly, many practical problems in the social sciences cannot be settled based on scientific enquiry alone, and therefore they cannot be relegated to experts. Rather, these questions should be tackled by each and every individual. I believe that the rational choice paradigm can be a powerful aid in thinking about such problems." I highly recommend this book.

After such a long time, I would like to revise my review, seeing Prof. Gintis updating his.
I begin with some counter-arguments to Gintis, and leave my original review below for those interested in my review.
I think Prof. Gilboa has a lot to say about Gintis' harsh comments, and while I agree with about half of what Gintis says, the other half I think will be totally counter-argued. I hope I do the job instead of Gilboa at least partially, since the author is not in the position to argue on the review area probably.

The sole counter argument that I want to pose here is Gintis' naive criticism on Gilboa's interpretation of experimental economics.
Gintis says, unless economists can take "given payoffs" as the utility to be maximized, economics becomes irrefutable. Oh god, this is how naive a very top social scientist is as opposed to natural scientists when "experimental science" or "observation" in general are concerned. How could he possibly think that the only way to peak into people's utility is "by DEMANDING the participants of the experiments to take the specified payoffs as the utilities in their minds"? Physicists have always struggled to construct various models and experimental devices to correspond the observable phenomena with the atomic model. There is apparently no one-to-one correspondence between atom's properties and external physical phenomena. Experimental economists likewise should do their best to dig deep into the minds of people, rather than simply asking them to take the artificial not-so-rewarding specified payoffs as the mental utilities. I wonder whether Gintis knows the idea of "research program" by Lakatos.
Gilboa's argument regarding prisoners' dilemma is perfectly legitimate, as far as I, a physics bachelor graduate turning into social scientist, see. This is why experimental economics still feels to reside somewhere between pre-science and normal science.

Thus, though a lot of Gintis' criticisms are insightful, including his pointing out that there is no reason for coming back to "rational choice" after introducing another definition of "rationality" (I actually personally asked this question to Prof. Gilboa before Gintis updated his review), I still continue to give the book a five star.
It does the excellent job in introducing what an authentic "paradigmatic thinking" is to social scientists.

=== Below is my original review ===

To summarize what I am going to say below, I should use the analogy of wine tasting.
I think the book corresponds to gourmet wine. And I think the quality is as high as it can get. The cost performance is astonishingly good compared with high quality wine, at least for me!
But, I do not expect the beginner to enjoy the delicate aroma of the book. You should first have a lot of idea about wine before going deep into the world of astonishingly expensive high grade wines. The book likewise is not suited for those trying to learn the taste of rational choice in the first place.
Since the book does not use technical mathematical expressions, the book may look ACCESSIBLE, like high grade wine, for everybody, but it does not imply it is fully ENJOYABLE for everybody.
Luckily, the book is monetarily accessible unlike high grade wine, so even beginners may consider having the book along with more standard books, in order to enjoy the feeling of what gourmet economics taste like.

I am personally a huge fan of Prof Gilboa's works -- I have all his books and also love his idea of case based decisions with Schmeidler.

Since I am giving 5 star in my rating, let me begin with the positive side. For those already familiar with rational choice in one way or another, I think the book is as fascinating as it can possibly get, as Gintis points out. What is particularly characteristic about the book, I think, is that Gilboa utilizes rational choice from very different directions. Borrowing the author's own expression, I believe that vast many readers will feel the "acrobatics" of utilizing rational choice concept -- that is to enhance the creativity of how to apply rational choice concept. Particularly, I would like non-economic social scientists such as sociologists to have a look into the book, before they start criticizing rational choice concept.

Next, I argue why I think the segmentation is important for this book. I agree significantly with Daniel Jensen's review. I do not think this book is for the beginners. As Gilboa points out in Chapter 1 of the book, "rational choice" is most fascinating when it is utilized as a paradigm. In order to enjoy the book, the reader has to have a feeling of rational choice paradigm. The problem with the book is that it starts giving "insights" before the readers' being exposed to the concept of rational choice. For example, Chapter 1 talks about the segregation of desirability from feasibility, but such an issue I think is only interesting for those who are familiar with the mathematical formulation of constrained optimization, but did not think explicitly as Gilboa did about the underlying assumptions. Thus, I think the book does not suit as a textbook on its own. The book may be used as a companion to standard books on rational choice such as Notes On The Theory Of Choice (Underground Classics in Economics).

For a beginner to gain a feeling of paradigm, she needs to get familiar with the concept, with more of the examples than the thought provoking counterexamples. You may possibly talk about the assumptions underlying Euclidean geometry, probably after you have got sufficient intuitive grasp of the concepts utilized in geometry, whether it is Euclidean or not. Hence, I do not recommend a beginner to use this book as a textbook for learning rational choice.

The following is my imagination. For a genius like Gilboa, it must have been too boring to revise what other people have already had written in their excellent textbooks. In each chapter, Gilboa tried his best to give some insights to his colleagues as well. And such insights, I think, look valuable only when you are used to the concept to some extent.