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Rationality in Markets Is Cognitively Unnatural

The views expressed are those of the author and are not necessarily those of Scientific American.

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The label “rational” is becoming illogical. Economists, even the better behavioral kind, use it particularly badly. That great scholar of human nature, Shakespeare, knew better. We evolved to be relationally rational. We productively resist certain transactional gains.

Consider the Ultimatum Game, which has a Proposer and a Responder. The Proposer is given some money and must offer the Responder a share. If the offer is accepted, each gets the relevant amount, but if it’s rejected, neither gets any. Economists predict “rational” acceptance of any offer, however low, since the Responder will benefit. But that’s not what happens. Below some level, which varies by culture, offers are rejected, “irrationally.”

Are there good reasons to reject gains in such situations? The impulse to incur costs (the forgone share) to punish those we feel treat us “unfairly” (by prevailing norms) can be very rational. Daniel Kahneman calls such feelings “fast thinking,” cognitive patterns that have worked well for so long that they’ve become instincts. These social instincts, if well configured culturally, can be rationally adaptive.

Rational, too, often means individualistic market-style thinking and modeling life as a stream of transactions with interchangeable others. But that’s a poor description of human life. Indeed that sort of individualism was invented only about 15 generations ago. And most cultures are still sociocentric.

Since before we were human, the logic of our survival has been social and relational. It was maladaptive to ignore the impact of our actions on others, or how they were seen, or their long-term effects. This equipped us with a relational rationality that included not just self-only and not only short-term factors.

Prioritizing fairness and reputation—both needed for the cooperation we depend on— over immediate gain, has likely been key to our survival for 10,000 generations. It still is. Definitions of self-interested rationality that exclude this truth, risk becoming self-undermining. Isn’t that truly irrational? Human self-interest has always had social constraints. Reputations, such as an exploiter or being exploitable, matter. As Othello says “Who steals my purse steals trash; ’tis…nothing…But he that filches from me my good name…makes me poor indeed”

Behavioral economics hasn’t cured this; it’s still too transactional. Cognitive biases contain a bias towards classical economics. They have two sources of potential error, the observed behavior and the supposedly rational ideal it deviates from. Using classical economics ideals, inherits their “cognitively unnatural” features.

Essentially all our key traits, including our rationality, evolved relationally. Until late in the rise of cities it couldn’t have been otherwise. Highly individualistic and transactional thinking often leads to poor results, for example in Prisoner’s Dilemmas. It can’t continue to be deemed rational to damage what we depend on.

Illustration by Julia Suits, The New Yorker Cartoonist & author of The Extraordinary Catalog of Peculiar Inventions.

Previously in this series:

Kahneman and Bentham’s Bucket of Happiness
Kahneman’s Clarity: Using Mysterious Coinage in Science
What Rational Really Means
The Cognitive Science of Star Trek
Colonoscopies Clarify Inner Workings of Minds
Happiness Should Be A Verb
Better Behaved Behavioral Models

Jag Bhalla About the Author: Jag Bhalla is an entrepreneur 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 His last book was I'm Not Hanging Noodles On Your Ears, a surreptitious science gift book from National Geographic Books, details at It explains his twitter handle @hangingnoodles Follow on Twitter @hangingnoodles.

The views expressed are those of the author and are not necessarily those of Scientific American.

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  1. 1. davenussbaum 12:41 pm 06/21/2013

    A couple of thoughts on another nice post:

    One thing that people tend to do a lot is overgeneralize. You learn a rule or a tendency (or a habit) that serves you well in many instances, and apply it to all instances. This can even make overall sense because it’s efficient. However, sometimes the overgeneralization leads to problems. This happens in all sorts of circumstances, from the basic heuristics and biases that Kahneman and Tversky & co. popularized, to tendencies we have like “don’t waste” which can sometimes lead to sunk cost errors. When you isolate just the instances in which general rules don’t work well — like the one-shot ultimatum game you described — it’s relatively easy to make people look irrational. However, as you also point out, the world itself has changed dramatically, and sometimes our overgeneralizations systematically lead us to make bad decisions. It can be helpful to identify those and try to correct them when they’re problematic.

    The second thought is on behavioral economics being too transactional — I think the first step in the process is to get economists to concede that the rational actor model is (sometimes useful) fiction. I think that has happened for the most part, but just because it seems obvious doesn’t mean that was an easy process. The next step, which is only just beginning, is to further inform people’s thinking about rationality with a richer, more accurate account of human psychology. That’s very much a work in progress.

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  2. 2. Noone 4:49 pm 06/21/2013

    Is there any evidence beyond supposition that Homo 200,000 years ago cooperated with fairness? After all, not a single world population genetically related to their truly remote ancestors even remains in the same place as those ancestors, with the exception of the generic Bushmen and generic Pygmies. That sounds more like 200,000 years of evolution by “my small group/you others” conflict.

    As for the claim that market individualism only arose 300 years ago, it’s ludricrous. It was well known 2000 years ago that, other than thievery by power, wealth was obtained by formal cold-hearted long-distance trade and formal no-hearted “more-than-arm’s-length” lending.

    Perhaps only a few were such individualists, but everyone not on a wealth-collection-by-power trip, or, rather more typically, under such powers, WANTED to be a cold-hearted trader.

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  3. 3. Son of Liberty 4:59 pm 06/25/2013

    Is this meant to be a rejection of the free market, because somehow we went through most of evolution without it? I would disagree w the the implication that the free market and cooperation are mutually exclusive.

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  4. 4. FOOZLER8 10:19 am 06/26/2013

    Will someone start a trend of NOT using the word ‘instinct’ unless it is empirically defined?

    “Well, like, you know what I mean, eh?”

    No, I don’t. Define it or stop pretending to be some sort of scientist. The way it is used constitutes a nominal fallacy -just using the word explains everything – NOT!!! (Pinker does this too.)

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