Faculty member in the Department of Managerial Economics & Decision Sciences until 2011
Pepsi or Coke? Coffee or tea? Over-easy or scrambled? Economists Christoph Kuzmics, an assistant professor of Managerial Economics and Decision Sciences at the Kellogg School of Management, and Olivier Gossner, a professor at the Paris School of Economics, don’t debate the appeal of Coke versus the underdog draw of its rival. Instead, they ponder why people care in the first place. “If one thing is better than the other, why does the worse one still exist?” Kuzmics asks rhetorically. “And if neither choice matters, why do we have such strong preferences?”
Gossner and Kuzmics conclude that people who stand by consistent rules when making decisions do better in the long run. In other words, the Pepsi- or Coke-drinker will succeed over the person who randomly grabs one or the other off the shelf—assuming that the Pepsi- or Coke-drinker applies such strong preferences to other matters in their lives as well. Even making a poor choice according to a rule, they say, could be a good move in the end.
Math, Mindsets, and M&Ms
Gossner and Kuzmics prove their point with a series of algebraic equations in which individuals chose between A, B, C, or D multiple times throughout their life, and the value of picking A, B, C, or D varies at each trial. When individuals choose A, B, C, or D according to a rule—such as always pick A over B—the results range from high to low on a distribution curve of total values. When no rule applies, the results pile up around the median point as a result of random choices that average over time. Therefore, the distribution spread for rule-makers is wide where that of non-rule-makers is narrow. Strict rule-makers risk losing badly (at the left end of the curve) if their rule favors a low-value letter, or stand to win big if the rule is right (at the right end of the curve). An inconsistent individual will fall somewhere in between.
Evolutionary biologists predict that traits and behaviors passed on through generations provide (or once provided) a population with a selective advantage over their competitors. Likewise, the tendency to stick to a rule could have been selected for over evolutionary time, to the degree that the behavior has been ingrained in certain individuals. The authors loosely refer to a population acting with consistent rules as one endowed with a “gene of rationality.” And if evolutionary time can provide any support for their speculation, strict preferences have been observed in monkeys, too. In a 2007 study, capuchin monkeys displayed personal preferences for different colors of M&M’s. When one monkey, for example, chose a red M&M over a blue one, it picked a green M&M over a blue one in the next round. It maintained its initial rule—do not choose blue. Psychologists and behavioral economists have interpreted the results of this experiment in various ways. But whether the decision was mired in payoff, emotions, expectations, or as a means to prevent regret, the act itself stands. Monkeys stuck to their guns, even when the choice hardly mattered.
Rationality in Irrational Choices
By looking at outcomes over time, Gossner and Kuzmics take a jab at a long-standing problem in economic theory regarding why people make irrational decisions. According to traditional economics, humans are rational actors who make decisions that maximize their well-being. Yet, rational people make poor choices quite often (why else would gas-guzzling Hummers exist?). And one can imagine that a serious Pepsi-lover might purchase Pepsi at a store where Coke costs less. Behavioral economists have noted these tendencies, and argue that individuals often make choices that run counter to their best interests because of a variety of psychological and social factors.
While Gossner and Kuzmics agree that people often make the wrong choice, however, they account for these choices by seeing them as part of a long chain of decisions. Choices do not occur in a vacuum. Environments change over time. A bad choice made under a consistent rule today could be the right choice tomorrow. And, if a rule repeatedly fails, the rational person will learn a new one. Complexity and change is in fact the game-changing aspect of Gossner and Kuzmics’s study (varying values of A, B, C, and D reflect that fluctuation). Kuzmics explains, “If the environment doesn’t change, a person who doesn’t think before choosing the right thing will be as well off as the person who thinks about their rule and chooses the right thing. But in reality, environments are complex and change, so there is a benefit to rationality.”
Rather than flip the tables on traditional economic theory and argue that people make irrational choices, Gossner and Kuzmics give humanity a break. Perhaps the person simply has not hit their stride. “What we offer,” conclude the authors, “is a reinterpretation of the source of maladaptation of choices to the environment as coming from a difficulty in reaching perfect adaptation when the agent is confronted with new situations, rather than a lack of rationality per se on the agent’s side.” Despite what behavioral economists say, rationality may yet prevail in the market.
Gossner, Olivier, and Christoph Kuzmics. 2008. “Evolutionary foundations of rational choice.” Working paper, Kellogg School of Management.