Tuesday, November 08, 2005

"Rational" choice

After reading several frightening stories about how much natural gas prices were going to increase this winter (due to increased demand and Katrina and Rita wiping out Gulf production), I decided to figure out whether it would be worthwhile for us to buy an electric space heater to supplement or replace our gas heat. Having a dedicated heater for the bedrooms would allow us to turn down the heat for the house at night.

This turned out into a fairly major project, involving looking up utility rates, standardizing the different units involved (natural gas is priced in "therms" while electricity is priced in kWh), estimating the cost per Joule for each form, and doing some back-of-the-envelope calculations about heat loss in various parts of the house.

Now I think math is fun, and I do heat transfer calculations all the time at work, so this wasn't a big deal for me, but it would have been a huge pain for most people. And yet economists assume that we all do this automatically, unconsciously, and, most importantly of all, correctly.

Obviously all fields make their assumptions, and I don't really have any deep insights into how important the breakdown of the perfect rationality assumption really is. Certainly I'm sure that many economists have thought deeply about the subject. However, my initial take on the subject that the more perfectly you expect people to conform to the perfect rationality, the more libertarian you'll be, whereas if you think people are very imperfectly rational, you'll be more technocratic.

The "pragmatic" case for libertarianism (that libertarianism is the best way to achieve other goals, rather than small government as an end in itself) is that people are better able to assess their own desires and risks than anyone else's. This is intuitively appealing, but if you think about it it really doesn't work. Consider smoking. A rational decision, I think, would incorporate *at least* the average rates at which smokers get diseases, the family history of cancer and other illnesses, the susceptability or lack thereof of people living in the same house, the cost of cigarettes, and the cost of health care. One might argue that our intuition does a good job of assessing these risks, but I don't believe it. In general, human intution is extremely bad at probability and statistics. Any number of simple probability questions are completely confounding to the average person. Why should we expect that intution will be better at an infinitely more complicated problem like smoking risk? Certainly it seems defensible to shift decision-making on this subject away from the individual onto those who have the time and expertise to deal with the issue. So drug laws, or tobacco bans, or seat belt laws can, I think, be defended *in principle* on these grounds. Whether *in practice* they're a good idea I'm not going to take a stand on right now.

I think this argument is a much better one (logically better, not politically better!) than the conventional argument in these cases, which is the argument from externalities. For (say) smoking, the conventional argument is that people ought to be discouraged from smoking, because their smoking indirectly imposes costs on others through the health care system. However, this is no one's real concern, and we all know it. Anti-smoking advocates aren't primarily worried about health insurance premiums--if they were, they'd be lobbying for health care reform, and they wouldn't get all upset when cigarette companies noted that smokers use less Social Security. They're worried about the health of smokers, and the health insurance angle is just a fairly transparent way to dodge charges of government paternalism.

Now of course actually arguing "you don't know enough to make these decisions for yourself" is politically toxic, and there are valid slippery slope concerns. But it would be nice if we could see some proudly paternalistic arguments, instead of seeing people make strained arguments about costs to others.