Irrationality in decision-making

Abstracts

299

~he~r connecnvIty Hence there are a large n u m b e r of issues that relate to such ,vstems In this lecture we will review questions about such systems in which the pTocessors have many hmlted c o m p u t a t i o n a l power and in which connections are local P a m c u l a r questions of interest include (1) the c o m p u t a t i o n a l power of such ~vstems, (2) the design of such systems tasks as assocmtlve m e m o r y , image pro~essing, robotics and learning, (3) the lmphcations of such systems as models of ~ndivldual and group behavior. In particular, we will discuss neural net systems and ~ertam classes of systems which c o m p u t e globally optimal solunons to certain problems of interest including optimal path selection

Foundations for applied welfare economics: some open or not-so-open issues. Arnold C Harberger, Department o f Economtcs, Umverstty of California, Los

4 ngeles, CA 90024, U S A We begin with a quick exposition of the three basic postulates of welfare economics Using these we then derive famihar results (1) Welfare cost (efficiency cost) of a tax (excise) (2) Welfare cost of m o n o p o l y (3) Apphcatlons to international trade (a) S t a n d a r d tariff analysis (b) The ' o p t i m u m tariff' (4) Quotas and quantitative restrlCtlOnS (5) General equilibrium analysis of taxes (a) The 2 × 2 case (b) General expressions for efficiency cost (6) Derivation of the ' R a m s e y Rule' (7) I n c o m e versus c o n s u m p t i o n taxation Then we follow with a discussion of issues that are m varying degrees matters of current controversy Coverage to extend as time permits (A) The use of the Ramsey Rule as a general guide to tax policy. Problems here arise from (i) On a serious intellectual plane, the fact that the categories defining goods and services are arbitrary Broad presumptions favor general taxes Ramsey Rule results tend to have a hypertechnlclSt flavor (n) On a m o r e m u n d a n e level, the fact that most people have very erroneous notions of what are the good substitutes (and complements) to leisure (This empirical matter weighs heavily in system-wide apphcatlons of the Ramsey Rule ) (B) The appropriate discount rate for social cost-benefit analysis (1) Discount rates directly derived using the three basic postulates are weighted averages of (a) the rates of marginal productivity of capital Los In different actlvines j and (b) the marginal rates of time preference rh for different groups k The weights can differ depending on the assumptions (canons 9) underlying the

300

Abstracts

d e r i v a t i o n Analogies with o t h e r m a r k e t s (n) T h e use o f a pure time preference rate for socml d i s c o u n t i n g requires lh~ ~t,,, t a n e o u s s h a d o w - p r i c i n g o f capital f u n d s . Issues here are (a) s h o u l d onl~ , ~I' f u n d s be s h a d o w - p r i c e d , or the full g o v e r n m e n t b u d g e t 9 (b) H o w can one t~ ,,~,! d i s c o u n t i n g by time preference rates rh w h e n they differ for different v~,,,,~ (c) P r a g m a t i c c o n s i d e r a t i o n s also apply (C) T h e use o f distributional weights In social cost-benefit analysis (1) I m p h c a t l o n s are exceedingly p o w e r f u l , causing people to question whetht~ ~I, t r i b u t l o n a l weights reflect their o w n value systems. (u) T h e n o t i o n of 'basic needs externahtles' is a plausible c o n t e n d e r against ~1~ b u t l o n a l weights. Its implications are less striking and it Is also fully comp,tt ~t with the three basic postulates

Irrationality in decision-making. A b r a h a m Kaplan, Graduate School o f Mum~ rnent, Umverslty o f Cahfornla, Los Angeles, CA 90024, U S A

,

Since F r e u d there has been Increasing recognition that Irrationalities have t t~, ~, o w n reasons, they need n o t elude e x p l a n a t i o n . Decision theories, w h e t h e r n o r m a l ~,~ or descriptive, often dismiss irrationality as belonging to w h a t is misleadingly ~dll,, the ' p s y c h o l o g y ' In c o n t r a d i s t i n c t i o n to the 'logic' o f d e c i s i o n - m a k i n g Theories ,~, over-simplified if they do n o t yield even first a p p r o x i m a t i o n s or at least fix upl~, or lower b o u n d s T h o u g h t is rational only if it is realistic as well as logical It n o t only draws log~,~ c o n c l u s i o n s f r o m its premises; It starts with realistic premises This conslderat~o~ especially i m p o r t a n t for theories m e a n t to define rationality U n r e a h s t l c p r e m ~ , p o i n t to several areas for increasing the applicability o f theories o f rational declslOl~ (1) E x p e c t a t i o n s are u n d o u b t e d l y real, but w h a t w o u l d m a k e t h e m realistic can b~ specified m o r e realistically. Neither the principle o f Insufficient reason nor hmH o f relative frequencies are significant in most decisions outside o f games and e x p e r i m e n t s , especially not in crucial situations where a single b a d d e c l s ~ w o u l d be fatal P e r s o n a l probabilities might be analyzable as g e n e r a t e d b\ c o m b i n e d a priori a n d f r e q u e n c y estimates repetition p r o d u c e s habit a n d hab~l m a k e s character, which is displayed m o r e in a succession of little, nameless. u n r e m e m b e r e d acts t h a n In rare, d r a m a t i c Instances o f agonizing choice (2) T h a t g a m b l i n g has no utility is n o t o r i o u s l y unrealistic Realism is not necessaNl~ served by the a s s u m p t i o n that the p o p u l a r i t y o f lotteries shows only that the utility o f m o n e y Increases m o r e t h a n linearly. G a m b l e r s typically play until the) lose their winnings, ff any Risk-taking m a y be perceived as proving m a c h i s m o , a n d m a y serve as a test o f divine (parental) favor (3) D e c i s i o n - m a k i n g takes time. T i m e needed for c o m p u t a t i o n points to the r a t l o n a h t y of the best decision possible rather t h a n the best possible decision In the course o f time, b o t h circumstances and o u r beliefs a b o u t t h e m change,