At my talk, "Why Not Rational Choice" I apologized for not having read much
economics and promised to remedy the situation by reading THE HANDBOOK OF
EXPERIMENTAL ECONOMICS by John Kagel and Alvin Roth. This book summarizes the
findings of experiments designed to test the assumptions of rat choice done by
economists. Needless to say, I was not looking forward to the experience. It
turned out to be much more interesting than I had imagined.

I have three conclusions based on reading this tome relevant to my talk:

First, the market mechanism works well. The law of supply and demand is alive
and well and confirmed by multiple experiements. Proper structure is necessary
and bad structures do not produce equilibrium. With a proper structure, however,
intelligence is not required. A ZI (zero-intelligence) group of traders does
almost as well as actual human beings and a ZI trader constrained not to make
bids that lose him money does as well. I conclude that the strong findings of
rat choice do not depend on the psychological assumptions of rat choice, or any
psychological assumptions at all.

Second, people do not maximize their expected utility. The basic story is that
pschologists do an experiment that shows that the psychological assumptions of
rat choice are wrong. Economists then replicate to show that pyschologists do
not understand ecnomics. Since 1970 none of these counter-attacks has succeeded
and experimental economists have reached the same conclusions as the
pyschologists: "there is a growing number of systematic violations of utility
theory that can be robustly demonstrated and reliably replicated in the
laboratory. Nevertheless, even a brief overview of the contemporary economic
literature reveals that ecnomists remain by and large content to model
individuals as utility maximizers." (p.78). Rat choice is bad psychology.

Third, I was delghted to find lots of support for learning. I was surprised to
find the economists on my side. Psychologists are interested in the workings of
the mind and thus are fascinated with errors. Economists counter that people
will perform according to rat choice predictions once they understand the rules
of the game. Learning produces movement toward equilibrium but errors and
anomalies never disappear.

An interesting sidelight is that someone replicated the human experiments on
rats and found they make the same errors. Rat choice tends to treat human beings
as disembodied rationality in a kind of enlightenment, pre- Darwinian view of
humanity. Recognizing that human beings are animals which have evolved, have
some natural capabilities but also clear and definable limitations should lead
to a more scientific approach.

SReed.

{Moderator's Note: Professor Reed, of Chuo University, Tokyo, gave his talk on
"Why Not Rational Choice?" at the Institute of Social Science, University of
Tokyo, on April 20.]