David H. Slater wrote:

>When analysts have to guess at actor's
>preferences... and to isolate single or at least
non-conflicting
>preferences, we have a pretty narrow range of
applicability...
>impossibly elastic definition of "utility," ...
>that we ignore actor's own imperfect understanding...
>

I agree. Even the "thin rational choice theory"--that actors rationally pursue their goals, whether the goals themselves are rational or not--ignores systemic cognitive biases. For example, rational choice theory rests on the proposition that, if someone prefers A to B and prefers B to C, then he must prefer A to C.
Sounds like common sense, but there are all sorts of cases where this does not apply. One classic
example: if A and B are presented separately, people chose A over B; however, if A and B are presented at the same time, there are types of cases where people reverse themselves and prefer B to A. This "reversal of preference" is a cogntive bias that skillful lawyers can use to sway juries regarding the size of compensatory and punitive damages. It is just as "irrational" as paying $400 rather than $300 for the identical TV. But don't people do this all the time when they buy Tylenol at a higher price instead of the generic brand with exactly the same ingredients at a lower price?

Similarly, there are lots of cases where people regularly lie to themselves even when such self-delusion hurts them. In many occupations, people systematically overestimate their skill, e.g. 80% of the people thinking that they are above average. The typical non-professional investor who actively trades stock for himself, thinking he can outsmart the market, does worse than if he engaged in fewer trades. Notably, women investors are less over-confident than men.
People starting small businesses, as well as CEOs, systematically over-estimate their chances of success.
That's bad for the entrepreneurs, but can sometimes be good for the economy. If people were more rational in pursuing their goals, we would not have as many entrepreneurs as we need. The few that succeed create enormous benefits for the rest of us. (It would be interesting to see research on cross-country comparisons of these sorts of cognitive
biases.)

This does not even get into cases where social affiliations or ideology skew perception, where a view of the "ought" skews the perception of the "is."

A realistic view of the limits of rationality does not leave us with nihilism since the cognitive biases can often be mapped and predicted.
This insight is the basis of "behavioral economics."

The rational self-interested actor is certainly part of the picture of human behavior and has proved very useful in economics. However, politics is far more complicated that economics. It needs a more comprehensive view, of which rational self-interest is only part.

Richard Katz
The Oriental Economist Report