The Big Myth of Rationality — Why Yours Eyes and Economists Naturally Lie!
“Humans think they are rational, and they think they understand their reality. But they are wrong on both counts.” Scott Adams
For over 2370 years it’s been argued that our objective reality goes as far as our subjective perception.
Plato imagined people who have been locked in a cave their entire lives. Only shadows of objects are casted on the walls in front of them. For the prisoners, the shadows represent all the knowledge.
One prisoner escaping the cave and seeing the world for the first time. He becomes enlightened and tries to go back to tell other about the sun and animals and what an actual tree looks like.
The prisoners get sarcastic, then very angry and plan to kill him.
Cat vs Wall-Street
We are rational when it comes to trivial matters.
Taking an umbrella when we see dark clouds.
Drinking water to quench our thirst.
As soon as the situation gets complex and our emotions get involved. Our rationality goes out of the window. We lean towards gut decisions and what feels right in the moment.
Why did I break off my last relationship?
Why did I peruse writing instead of a college degree?
I could tell you now for sure my rational reasons but I’d be lying to you. My decisions were ruled by guilt and hate respectively more than rational thinking and logic.
At least in the moment.
Let’s search beyond myself.
The place where one would expect to find an above average rationality is when there is large sums of money involved right?
An investment challenge has put up professional investors against school children and a ginger cat named Orlando.
They all started with £5000. At the end of the year the experienced investors had £5,176, the students were down to £4,840, and Orlando had amassed £5,542.
You might imagine Orlando in his Zenga suit sniffing catnip that he cut up on his Patek Phillip and cussing on the phone and while walking up and down the the trading floor.
But no, he used his favorite toy mouse!
While the professionals used their decades of investment knowledge and traditional stock-picking methods, the cat selected stocks by throwing his favorite toy mouse on a grid of numbers allocated to different companies.
The bottom line for this irrationality is that we didn’t need it. Nature didn’t care whether we understand reality or not.
Evolution cares only that you survive long enough to procreate. And that’s a low bar. The result is that each of us is, in effect, living in our own little movie that our brain has cooked up for us to explain our experiences” Scott Adams
One of the easiest ways to showcase our fundamental lack of understanding reality is the double slit experiment.
This where physics and magical marry.
Let me try and illustrate -for the first time- without using any jargons and as simply as I can put it:
If we pour sand on a plate with 2 holes this would happen:
If you shine sunlight which is also made up of particles you’d expect to see this:
But instead you see this:
Because for some unknown reason, particles act like waves sometimes. and waves collide and create special patterns. So you’ll see a bright dot in the middle and couple on each side fading away in colors.
The crazy part is. If you decide to “look” at the waves to see it happening right between the 2 barriers. It will act like sand always.
The crazier part even. You can try shooting one single atom at a time. If you look (with a detector) they will land were you expect them to like sand.
If you don’t (literally unplug the detector) It will act like waves. However, WITHOUT ANOTHER ATOM AT LEAST TO COLIDE WITH.
Still got some brains left? Let me empty them for sure:
By placing a detector behind the holes. You would see the particle choose or the other hole to go through to form a sand like pattern.
By placing the detector after the holes
It seems to us as if it had either decided which hole to go through (in the past) after encountering the detector or teleporting instantly to one hole after encountering the detector. Those are the only 2 plausible scientific explanations.
Here is a nice detailed explanation: https://www.youtube.com/watch?v=A9tKncAdlHQ
Isn’t it insane? Teleportation and being affected by an observer? We clearly don’t know what’s going on on a deep level.
How about more day to day like?
Estimating your ability across a wide range of tasks? Surely you know yourself better than the stock market or quantum physics!
94% of faculty members ranked themselves better than average teachers.
87% of students rated their academic performance as above the median.
88% and 77% of the U.S and Swedish drivers from a survey put themselves in the top 50% when it comes to safe driving.
85% of the over 1 million students annually (question in SAT exam ) put themselves above the median and 25% rated themselves in the top 1%. when asked their ability to get on well with others.
It’s not a question of whether we can be rational or not, we certainly can but are we most of the times? I don’t think so.
When it comes to big decisions, unlike animals, we get infected with worry, doubt and egocentrism. Our neurological wiring is full of blind spots that leave our cognition with tendencies that are far from logical.
It gets really messy really quick. The Hindsight bias for example is a tendency to view past events as being predictable.
This explains why it is remarkedly much easier to rationalize past events (like breaking up or dropping out).
There is a way to tell though.
Truth has predictive power, so the next time you catch yourself rationalizing something that happened in the past, extend it to the future and see how it holds up. If it fails to predict what happens don’t beat yourself up.
You’re just flawed by nature. Like the rest of us.
Economists Are Full of Sh*t
I’ve studied economics for 2 years before dropping out. It’s dangerous to treat economics as hard science.
It’s a soft science with fuzzy edges. It mostly lacks scientific rigor because the scientific method requires generally real experiments in the real world.
Economical studies are mostly theoretical and take 3 assumptions to make the models work:
- People have rational preferences (Homo economicus)
- People maximize utility and firms maximize profit.
- People have Perfect information
The 3 major theories of economics are Keynesian economics, Neoclassical economics, and Marxian economics
The first 2 need those assumptions and the third is an unworkable utopian dream.
It’s brutal. Rationality aside, who has perfect information?
With perfect information in a market, all consumers and producers have complete and instantaneous knowledge of all market prices, their own utility, and own cost functions. Wiki
Can you quantify for me the utility of your dog ?!
Did you know every company and every model and all the prices of laptops and their value before you made your purchase?
I bet not.
“Those with brains and no balls become mathematicians, those with balls and no brains join the mafia, those with no balls no brains become economists ” Nassim Talab — author of “Back Swan” and “Skin In The Game”
Economics may explain how the world works, but their methods suddenly fail miserably when it try’s to predict what will happen. Sounds familiar?
The Discomfort of Irrationality
Here is how you can to tell if you’re engaged in irrational behavior.
Look for a physical discomfort of a sort. Shame, regret, stress or anger may come by only to expose Irrationality. The name of this discomfort is called Cognitive Dissonance.
It’s holding 2 contradicting thoughts in the same time.
It’s by far the most common irrationality type. Ask smokers!
I know that smoking kills but I still do it.
You care for animals, but you still eat meat.
The way we walk around those contradictions is by being irrational.
I justify my smoking sometimes by exercising 7 days a week. It’s an illusion. It’s bullsh*t. Yet it eases the discomfort and that’s what matters, so I go with it.
People usually trivialize the matter as an easy way out. “I don’t care” “it doesn’t bother me”. That’s is a way to combat the unease too.
Or they change what they know to overpower the other thought. “Smoking depresses appetite so it helps you lose weight” A friend recently told me.
Here is a fenny comic strip on cognitive dissonance: https://dilbert.com/strip/1992-08-09
The fact that we are 90% irrational and 10% rational makes it clear that we both need to take a long minute on big decisions. Understand biases that might be involved and hidden dissonances. We can be rational when we we try and brush the mixed bag of emotions to the side and not trust economist all the way!
One takeaway is this: If you can’t use the same line of logic to predict on any scale, it’s probably irrational.