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Where in Adam Smith does he assume rational actors?

jrs235 9y ago
Smith’s basic position and teaching posits that though it is not commonly thought in such terms, humans act rationally and thus typically act in their own self-interest. Decisions are generally made based on financial prudence and intrinsic satisfaction. These assumptions are key to economic analysis and commercial success.[1] [1] http://www.investopedia.com/terms/s/self-interest.asp http://www.investopedia.com/terms/s/self-interest.asp
- smokeyj 9y ago
  Do you have an example of someone not acting in their (voluntary) self interest?
  - wpietri 9y ago
    The whole field of behavioral economics [1] examines this question. It sees human rationality as sharply bounded [2] with an enormous set of cognitive biases. [3] The field is seen as a direct challenge to the notion of humans as rational actors. If you want examples, they are legion. Addicts, for example, clearly don't act in their own rational self interest. Whether it's substances (e.g., alcohol and other drugs) or experiences (like gambling and gaming), whole industries are built around exploiting people's inability to act in their self interest. Another example is advertising. In economic theory, advertising and PR are about informing people, giving them new facts. But when you look at actual advertising, it's about giving them new feelings, about manipulating their decidedly non-rational behavior. And there are plenty more. If you look the kinds of things consumer protection agencies get up to, you'll find plenty of examples. [1] https://en.wikipedia.org/wiki/Behavioral_economics https://en.wikipedia.org/wiki/Behavioral_economics [2] https://en.wikipedia.org/wiki/Bounded_rationality https://en.wikipedia.org/wiki/Bounded_rationality [3] https://en.wikipedia.org/wiki/Cognitive_bias https://en.wikipedia.org/wiki/Cognitive_bias [4] e.g., https://hbr.org/2009/07/the-end-of-rational-economics https://hbr.org/2009/07/the-end-of-rational-economics
    - smokeyj 9y ago
      My point is humans have self-interest, and that humans act rationally to satisfy that self-interest. Not that the self-interest is "rational". An alcoholic who buys liquor is acting rationally according to his interest of getting drunk. Being an alcoholic may not be rational (to us). But I'd rather operate in an economic framework that doesn't judge the rationality of my interest, but that I have self interest and act rationally.
      - svachalek 9y ago
        There are plenty of behaviors like price anchoring that are irrational regardless of the supposed interest. The whole rational actor model is an interesting thought experiment, but naive.
        smokeyj 9y ago
        > irrational regardless of the supposed interest. What does this mean?
      - jononor 9y ago
        What you've gotten is an economic framework where companies find and exploit every human weakness they can. And then the presumed self-interest and rationality of the individual is used as a way to make such behavior seem more legitimate.
      - wpietri 9y ago
        That is a circular definition of rationality: What's rational? What people do. How do we describe what people do? Whatever they do, it's rational. Your point about self-interest is similarly tautological. If people against their conscious choice do things they know are bad for them, which is what addicts do, then it seems absurd to me to define that as "self interest". I'd say "rational" should instead mean what it commonly does: "in accordance with reason or logic". And "self interest" should mean something like "to the actor's long-term benefit". In which case, people frequently act irrationally and against their self interest. Which is certainly what the field of behavioral economics has been demonstrating.
  - MrFantastic 9y ago
    Poor, out-of-work factory workers voting for a billionaire shyster.
- dragonwriter 9y ago
  > These assumptions are key to economic analysis and commercial success. Well, I mean, they are key to the well-established-as-false rational actor model that for a long-time ruled the social sciences (well, with the notable exception of psychology, which had it's own different challenges) as the one overarching model of human behavior. It does provide a convenient framework for useful first-order approximations in some (especially mass aggregate) situations, with some supporting assumptions, still.
- bmmayer1 9y ago
  "Self interest" doesn't imply rationality, it just means that people generally do what they want to do, for their own goals. Adam Smith never claims that people's goals make rational sense. The efficient market hypothesis is a 20th century invention. "Homo economicus" is a 19th century invention. Smith's interests were philosophical, not economical. His biggest contribution was the observation that self interest is a force for net social gain, because every person pursuing their own interests leads to greater prosperity for all. Hence his famous quote: "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages."

Smith’s basic position and teaching posits that though it is not commonly thought in such terms, humans act rationally and thus typically act in their own self-interest. Decisions are generally made based on financial prudence and intrinsic satisfaction. These assumptions are key to economic analysis and commercial success.[1] [1] http://www.investopedia.com/terms/s/self-interest.asp http://www.investopedia.com/terms/s/self-interest.asp

smokeyj 9y ago
Do you have an example of someone not acting in their (voluntary) self interest?
- wpietri 9y ago
  The whole field of behavioral economics [1] examines this question. It sees human rationality as sharply bounded [2] with an enormous set of cognitive biases. [3] The field is seen as a direct challenge to the notion of humans as rational actors. If you want examples, they are legion. Addicts, for example, clearly don't act in their own rational self interest. Whether it's substances (e.g., alcohol and other drugs) or experiences (like gambling and gaming), whole industries are built around exploiting people's inability to act in their self interest. Another example is advertising. In economic theory, advertising and PR are about informing people, giving them new facts. But when you look at actual advertising, it's about giving them new feelings, about manipulating their decidedly non-rational behavior. And there are plenty more. If you look the kinds of things consumer protection agencies get up to, you'll find plenty of examples. [1] https://en.wikipedia.org/wiki/Behavioral_economics https://en.wikipedia.org/wiki/Behavioral_economics [2] https://en.wikipedia.org/wiki/Bounded_rationality https://en.wikipedia.org/wiki/Bounded_rationality [3] https://en.wikipedia.org/wiki/Cognitive_bias https://en.wikipedia.org/wiki/Cognitive_bias [4] e.g., https://hbr.org/2009/07/the-end-of-rational-economics https://hbr.org/2009/07/the-end-of-rational-economics
  - smokeyj 9y ago
    My point is humans have self-interest, and that humans act rationally to satisfy that self-interest. Not that the self-interest is "rational". An alcoholic who buys liquor is acting rationally according to his interest of getting drunk. Being an alcoholic may not be rational (to us). But I'd rather operate in an economic framework that doesn't judge the rationality of my interest, but that I have self interest and act rationally.
    - svachalek 9y ago
      There are plenty of behaviors like price anchoring that are irrational regardless of the supposed interest. The whole rational actor model is an interesting thought experiment, but naive.
      - smokeyj 9y ago
        > irrational regardless of the supposed interest. What does this mean?
    - jononor 9y ago
      What you've gotten is an economic framework where companies find and exploit every human weakness they can. And then the presumed self-interest and rationality of the individual is used as a way to make such behavior seem more legitimate.
    - wpietri 9y ago
      That is a circular definition of rationality: What's rational? What people do. How do we describe what people do? Whatever they do, it's rational. Your point about self-interest is similarly tautological. If people against their conscious choice do things they know are bad for them, which is what addicts do, then it seems absurd to me to define that as "self interest". I'd say "rational" should instead mean what it commonly does: "in accordance with reason or logic". And "self interest" should mean something like "to the actor's long-term benefit". In which case, people frequently act irrationally and against their self interest. Which is certainly what the field of behavioral economics has been demonstrating.
- MrFantastic 9y ago
  Poor, out-of-work factory workers voting for a billionaire shyster.
dragonwriter 9y ago
> These assumptions are key to economic analysis and commercial success. Well, I mean, they are key to the well-established-as-false rational actor model that for a long-time ruled the social sciences (well, with the notable exception of psychology, which had it's own different challenges) as the one overarching model of human behavior. It does provide a convenient framework for useful first-order approximations in some (especially mass aggregate) situations, with some supporting assumptions, still.
bmmayer1 9y ago
"Self interest" doesn't imply rationality, it just means that people generally do what they want to do, for their own goals. Adam Smith never claims that people's goals make rational sense. The efficient market hypothesis is a 20th century invention. "Homo economicus" is a 19th century invention. Smith's interests were philosophical, not economical. His biggest contribution was the observation that self interest is a force for net social gain, because every person pursuing their own interests leads to greater prosperity for all. Hence his famous quote: "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages."