Pavel Sebastian

ANR 403400

Gaus is stating in his first chapter that economic and instrumental rationality are
similar in that they are linked by beliefs and that both of them are interested in
actions, or choices. The basic assumption is that beliefs are representing one’s
mental states and that there is an intrinsic unity between thinking and doing. Even
if economical thought assumed the image of man as a self-interest seeking animal
and a utility maximizer, this is hardly an anthropological view, but rather an ideal
model which simplifies economic functions and permits the possibility of calculus in
probabilistic functions and decision theory.

Given this, we can see economics as a theory that already incorporates a certain
view over human rationality and which is also the theory of that view. Therefore,
economics is a theory of rationality, and its core is the instrumental theory of
rationality. But in the same time it can be seen also as a narrow view over
rationality when it tries to be the only paradigm, because its core is the
instrumental theory of rationality, and as such limited to measurable quantities or
formalist approaches which ignore anything that is not conscious or expressed as
such. This is how many critics interpret the economic approach to rationality.

This is the reason why economic thought did not expressly affirmed its view over
rationality outside its own field from the beginning (in Hobbes’s time, the language
used for the portrayal of the economic rationality was still indebted to metaphysics
and to notions as “human nature” and universal rationality), even though it is
employed outside it. Now, economic rationality is interested in the groundedness of
the beliefs on which the agent acts. These cannot be thoroughly subjective, neither
based on their effectiveness because even if these may offer an explanation of
one’s reasons it cannot substitute the requirements of universal intelligibility. Sam
might not consider rational that Jim punched that guy because he felt like it. Jim
might offer an explanation, but its rationality is constrained on Jim’s own
experiences and perspectives over life. It was the thing to do only for him, and thus
outside any common field of rational behavior. Because rationality must be shared
through a common understanding of it to be able to describe the behavior of
agents. As such, economic rationality is about the functions of rationality as
observed in the common behavior: actions as choices - when there are choices to
chose from - these implying a decision, which imply beliefs, and preferences, and
goals, able to justify the choice, not in front of a tribunal of rationality, but for the
agent itself. The requirement of consistency between choices and beliefs is a logical
necessity, but also can be viewed as a psychological must for the agent. Rationality
cannot subject itself to a single type of result: instrumentality, effectiveness or
subjective rationality, because that would limit its range of functions and would
introduce a complexity factor that is not necessary and would also marginalize
economic rationality to its own theory therefore rendering it only as a theoretical
construal, denying its factual implications. This is why rationality is thought as a
general set of relations between actions and beliefs, thus circumscribing the
entirety of conscious human action under the assumption that there is a
correspondence between what is visible (event) and what is not visible (intentions,
beliefs etc), and that there is a framework of cognitive processes that makes all that
possible.
In this point we can affirm that economic rationality is not just about instrumental
reason, because then even desires would be interpreted just as goals which must be
satisfied, as constant psychological structures - which is not the case - mechanizing
the psychological processes which are involved. The desire to see a film is not about
how to get rid of the desire, but about the pleasure involved in it, not a utility
measure, but a subjective feeling unrelated to hedonism. The action here is actually
seeing the film, and not an instrumental act of satisfaction.

The second chapter presents what a preference is all about and its connection with
the broader interpretation of utility theory through the axioms of ordinal and
cardinal utility. Utility is related with preference because both of them are products
of deliberative processes of rationality. The ordinal and cardinal utility are
prescribing that preferences can have degrees, meaning that they are not absolute
and that being based on deliberative processes they can, usually, be modified over
time or replaced entirely. In the same time, a preference is always a subjective
construal of comparative choices, every time a choice is made, there is an
opportunity cost reminding us what we have lost by making this or that particular
choice. But one’s choices do not constantly and consistently reveal one’s
preferences because there is not determinate behavior to be determined through
the choices made by an agent. As stated above, even if there is in the economic
thought the premise of consistency between actions and thoughts (intentions,
beliefs etc.), the mental state assigned to a choice or another is not easy to
determine. In other words, even if the actions of the agent are consistent, it is very
likely that they do not have the same meaning every time. The only thing that may
be interpreted as revealed is a deliberative ranking of the options of choice and of
outcomes (the consequence domain) by the agent. It is not important why the
agent is ranking states of the world, but that he is able to rank them. The outcomes
preferred by the agent determine the type of action-option the agent will choose (if
they are stable). Every time an outcome receives a different ranking than before,
the agent’s preferences over action-options change.

We can generate an ordinal utility function for any agent in terms of his preference
rankings for the different outcomes if his rankings satisfy the following standard
conditions for a weak ordering: the ordering is complete, the agent can always rank
options in his feasible set and decide between actions; the preference relation can
be asymmetric – if a choice is strictly preferred over another - , or symmetric, if the
agent is indifferent to the action-option he has to choose for an outcome; reflexivity,
that the outcome of a choice is identical with the projected outcome before the
choice was made; and transitivity, where the agent’s preference rankings between
action-options is conserved on a hierarchical mapping of possible choices. Following
this, utility is not a function in itself; it does not explain preferences, but provides a
representation of one’s preferences.

Cardinal utility theory is designed in such a way to disperse the uncertainties of

preference ranking through ordinal utility. In the case of the latter, we do not know
the numerical distance between preferences. Even if x is preferred over y, y over z,
and x over z through the law of transitivity, we cannot rightfully assume their
concrete ranking on an agent’s scale of preferences. If x is the highest ranked
option, we cannot say for certain what position y and z occupies. As a consequence,
additional axioms are needed: the agent’s preferences must be continuous, this
meaning that for a set of options between x, y, z, where x is the highest ranked
option, the agent will always trade the other two options for a high probability of x;
the agent must conform to the better prizes outcome - if we suppose a lottery with
equal chances of success, the agent will chose the one which conforms to his
highest ranked preference; a corollary of the latter axiom is the better chances
axiom, which restates the better prizes axiom but in terms of probability, therefore
the agent will choose the option with the highest probability of his highest ranked
preference; and finally, reduction of compound lotteries – if the prize is another
lottery, this can be reduced to a simple lottery between prizes. The ultimate
concern is the prize and not the gambling. If the agent meets these conditions, it is
possible to convert his ordinal utilities into cardinal ones, giving us “the size of the
differences in the payoffs for each where the higher number, the better the
outcome”.

Of course, there are exceptions, and these are related to the factual consistency of
the above axioms and with the indelible complexity of options the agent is faced
with. His choices are not just linked to possible external action-options, but also with
options of desired subjective mental states resulted in light of the choices the agent
made. What is inviting about cardinal utility is that it can be employed to perform
expected utility calculations, by distinguishing a person’s preferences over
outcomes from her preferences over action-options.

Utility theory is not, as often is viewed, a formalization of instrumental rationality.

The criteria of ranking one’s preferences can be any reason whatsoever. A utility
function can be generated any time one can determine which is the best outcome,
irrelevant to the criteria of ordering. Also, best does not necessary imply a practical
satisfaction. Given this, there is no reason for us to believe that the relation
between ranked actions and outcomes sustain an implicit consequentialism with the
theory of instrumental action. The maximization of one’s utility is not the same with
the maximization of one’s goals or aims. Last but not least, the justification of one’s
preferences involves so many psychological factors that it is almost impossible to
circumscribe one’s choices to a stable and consistent interpretation over his
actions. Utility theory and decision theory are offering a possibility of rational choice
in situations involving risk, and not uncertainty, as such, if something can sustain a
degree of probability, is likely to be formalized through utility theory axioms, but are
still independent by the, so much criticized, narrow behavioral view of Homo
Economicus, which is not a complete theory of rational action, but, as I already said,
a simplified supposition necessary for the description of functional patterns of
rationality.