Rationalization in Decision Making
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Economics Strategy Jul 1, 2009

Ratio­nal­iza­tion in Deci­sion Making

Why we don’t always choose our favorite option

Man walks up path of arrows

danleap via iStock

Based on the research of

Vadim Cherepanov

Timothy Feddersen

Alvaro Sandroni

Listening: Interview with Timothy Feddersen

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If you are like many peo­ple, you enjoy choco­late and eat it fre­quent­ly. That’s okay, you might think. After all, choco­late has antiox­i­dants and it boosts your mood. 

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Although this may be true, it is not the real rea­son why you eat choco­late: it is just a line of rea­son­ing you fol­low to feel less guilty about eat­ing some­thing high in fat and sug­ar. Peo­ple often ratio­nal­ize in this way, telling them­selves sto­ries of some­times dubi­ous mer­it to jus­ti­fy their behav­ior. New work by Tim­o­thy Fed­der­sen (Pro­fes­sor of Man­age­r­i­al Eco­nom­ics and Deci­sion Sci­ences at the Kel­logg School of Man­age­ment) shows how ratio­nal­iza­tion — once stud­ied main­ly in psy­chol­o­gy — impacts choic­es and can help econ­o­mists under­stand why peo­ple make deci­sions that vio­late stan­dard eco­nom­ic theories.

Peo­ple have pref­er­ences. But they can­not choose any old thing they like because they have to be able to ratio­nal­ize the choice,” explained Fed­der­sen, who col­lab­o­rat­ed on this project with Alvaro San­droni (Pro­fes­sor of Polit­i­cal Econ­o­my and Pro­fes­sor of Man­age­r­i­al Eco­nom­ics and Deci­sion Sci­ences at the Kel­logg School of Man­age­ment) and Vadim Cherepanov (an econ­o­mist at the Uni­ver­si­ty of Pennsly­va­nia). He invoked the basic eco­nom­ic prin­ci­ple of con­strained opti­miza­tion, by which indi­vid­u­als seek the great­est pos­si­ble ben­e­fit giv­en the lim­i­ta­tions and demands of a sit­u­a­tion. Ratio­nal­iza­tion means that peo­ple are con­strained opti­miz­ers, and one of the con­straints [in the way of choos­ing a pref­er­ence] is that they have a psy­che that requires a ratio­nale,” he said.

In 1920 Sig­mund Freud described the id, ego, and super­ego in his sem­i­nal essay Beyond the Plea­sure Prin­ci­ple.” He intro­duced the idea of defense mech­a­nisms, which humans use to quell anx­i­ety cre­at­ed when we feel we can­not do what we want and still be ratio­nal. While Freud was the first to describe the con­cept of defense mech­a­nisms, it was one of his col­leagues who iden­ti­fied one defense mech­a­nism in par­tic­u­lar a few years ear­li­er. In his 1908 arti­cle Ratio­nal­iza­tion in Every-Day Life,” Ernest Jones wrote, Every­one feels that as a ratio­nal crea­ture he must be able to give a con­nect­ed, log­i­cal, and con­tin­u­ous account of him­self, his con­duct, and opin­ions, and all his men­tal process­es are uncon­scious­ly manip­u­lat­ed and revised to that end.”

The Warm Glow” Mod­el
Fed­der­sen has spent much of his career exam­in­ing human con­duct and opin­ions as expressed through vot­ing behav­ior. He has explored why peo­ple con­tin­ue to show up at polls even though each indi­vid­ual vote has lit­tle impact on the larg­er elec­tion. Fed­der­sen and San­droni devel­oped an eth­i­cal vot­er” mod­el, which states that peo­ple feel per­son­al­ly val­i­dat­ed by vot­ing for a can­di­date they feel is moral­ly or eth­i­cal­ly supe­ri­or. From this mod­el they devel­oped what they call a warm glow” mod­el, sug­gest­ing that peo­ple vote because being a respon­si­ble cit­i­zen sim­ply feels good.

Ratio­nal­iza­tion the­o­ry reveals a unique pref­er­ence order in a vari­ety of cas­es when stan­dard the­o­ry cannot.”

Some econ­o­mists have strug­gled to explain behav­iors that vio­late stan­dard choice the­o­ry, and won­dered if the warm glow mod­el could explain such anom­alies. Accord­ing to this the­o­ry, a per­son has a set of pref­er­ences. He prefers X over Y, Y over Z, and there­fore should always pre­fer both X and Y over Z. But some­times he might choose Z any­way. Fed­der­sen and his col­leagues did not think that the warm glow argu­ment pro­vid­ed the best expla­na­tion for such vio­la­tions of stan­dard the­o­ry. So they began to look at ratio­nal­iza­tion as a way to under­stand this seem­ing­ly odd behavior.

To put a human face on the math­e­mat­i­cal proofs they describe, Fed­der­sen and col­leagues tell the sto­ry of a woman named Dee. Dee decides to leave work ear­ly to cel­e­brate with her friend Sal­ly, who just got a new job. As Dee pre­pares to leave the office, she gets a call from her cowork­er, Kathy, who is in the hos­pi­tal and would like vis­i­tors. Dee then calls Sal­ly to tell her she can no longer cel­e­brate because work is press­ing and stays at the office.

This com­mon type of behav­ior vio­lates stan­dard eco­nom­ic the­o­ry. Ini­tial­ly, Dee seems to pre­fer Sal­ly over work. When a third option is intro­duced — the hos­pi­tal — this pref­er­ence for Sal­ly over work should not change. Even if Dee ranks her pref­er­ences as (1) hos­pi­tal, (2) Sal­ly, and (3) work, she should still nev­er choose work over Sal­ly. Yet that is exact­ly what Dee chose, work instead of Sal­ly, in vio­la­tion of stan­dard theory.

No Ratio­nal­iza­tion, No Deci­sion
Feddersen’s ratio­nal­iza­tion mod­el pro­vides an intu­itive expla­na­tion for Dee’s behav­ior. We can under­stand why — when we intro­duce this third alter­na­tive — Dee can’t vis­it her friend Sal­ly. She can’t ratio­nal­ize it,” he said. That is, a deci­sion that can­not be ratio­nal­ized is a deci­sion that can­not be made.

Dee can always find ratio­nal­iza­tions to stay at work — work is press­ing. And she can also ratio­nal­ize leav­ing work ear­ly to vis­it Sal­ly because friend­ship is some­times more impor­tant than work. This is the ratio­nale Dee orig­i­nal­ly uses. But once she learns that Kathy is in the hos­pi­tal, Dee can no longer ratio­nal­ize vis­it­ing Sal­ly because Kathy needs her sup­port more. This new infor­ma­tion, hav­ing made it impos­si­ble to ratio­nal­ize her orig­i­nal pref­er­ence to have fun with Sal­ly, leaves Dee with only two options — stay at work or vis­it the hos­pi­tal. Because she prefers stay­ing at work to vis­it­ing the hos­pi­tal, Dee choos­es to stay at work.

Feddersen’s work illus­trates how an inabil­i­ty to ratio­nal­ize a pref­er­ence can con­strain our abil­i­ty to pick a favored option. More­over, ratio­nal­iza­tion the­o­ry reveals a unique pref­er­ence order in a vari­ety of cas­es when stan­dard the­o­ry can­not,” wrote Fed­der­sen and col­leagues. This is impor­tant to econ­o­mists and pol­i­cy mak­ers who can only observe behav­iors and choic­es, from which they must infer people’s preferences.

Accord­ing to Fed­der­sen, the research rais­es two ques­tions for the future. First, why are peo­ple ratio­nal­iz­ers? And sec­ond, how does a group decide which ratio­nales are accept­able? We’re some­times con­strained to choose what we would like by our inabil­i­ty to ratio­nal­ize. And the ques­tion is, Why would we be lim­it­ed by that?’”

Fur­ther reading:

Freud, Sig­mund (1920). Jen­seits des Lust­prinzeps (Beyond the Plea­sure Prin­ci­ple). Leipzig-Vien­na-Zurich.

Jones, Ernest (1908). Ratio­nal­iza­tion in Every-Day Life.” Jour­nal of Abnor­mal Psy­chol­o­gy, 161 – 169.

Featured Faculty

Timothy Feddersen

Wendell Hobbs Professor of Managerial Politics, Professor of Managerial Economics & Decision Sciences

Alvaro Sandroni

E.D. Howard Professor of Political Economy, Professor of Managerial Economics & Decision Sciences

About the Writer

Meghan Holohan is a freelance writer based in Pittsburgh, Penn.

About the Research

Cherepanov,Vadim, Timothy Feddersen, and Alvaro Sandroni. “Rationalization,”
working paper, August 25, 2008.

Read the original

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