One problem with this post, which is also seen in various other posts in the sequences and many LW posts in general, is the tendency to jump to conclusion that people’s behavior is irrational. Neither of these examples (Casey Serin and the LTCM people) strikes me as being obviously irrational, in the sense that these people would be acting against their own interest clearly and to an unusual degree.
This is especially true of the LTCM example. While it might be possible that this venture was really a mistake for Merton, Scholes, and the others involved (from the perspective of their own self-interest), the way this conclusion is reached in the post and the idea that they would have something to learn from being lectured about this topic are just childishly naive.
The whole Bayesian being an ultra-rational agent and any deviation on the part of humans is a sign of irrationality has been moved away from by some economists. Now some think that humans are rational and the trick is to figure out how what appears irrational at first glance can be considered rational. This because the model for rationality didn’t give very many useful results outside of gambling and playing stocks, even then people have gotten burned by it.
Much of it comes down to limited information and variable time preferences.
I think you misunderstood my point. I meant that the behavior of these people may well have been rational, or at least not remarkably irrational, by the standard economic definition of the term, i.e. in the sense of advancing one’s own self-interest.
Even if you’re responsible for a failure with large total costs, this may still advance your self-interest if the benefit you derive from it is larger than the share of the costs you have to bear yourself (plus of course the future reputational and other indirect costs, of course). It seems to me this may have been the case in both examples from the original post, so it’s unjustified to parade them as obvious examples of irrational behavior.
One problem with this post, which is also seen in various other posts in the sequences and many LW posts in general, is the tendency to jump to conclusion that people’s behavior is irrational. Neither of these examples (Casey Serin and the LTCM people) strikes me as being obviously irrational, in the sense that these people would be acting against their own interest clearly and to an unusual degree.
This is especially true of the LTCM example. While it might be possible that this venture was really a mistake for Merton, Scholes, and the others involved (from the perspective of their own self-interest), the way this conclusion is reached in the post and the idea that they would have something to learn from being lectured about this topic are just childishly naive.
Agreed.
The whole Bayesian being an ultra-rational agent and any deviation on the part of humans is a sign of irrationality has been moved away from by some economists. Now some think that humans are rational and the trick is to figure out how what appears irrational at first glance can be considered rational. This because the model for rationality didn’t give very many useful results outside of gambling and playing stocks, even then people have gotten burned by it.
Much of it comes down to limited information and variable time preferences.
I think you misunderstood my point. I meant that the behavior of these people may well have been rational, or at least not remarkably irrational, by the standard economic definition of the term, i.e. in the sense of advancing one’s own self-interest.
Even if you’re responsible for a failure with large total costs, this may still advance your self-interest if the benefit you derive from it is larger than the share of the costs you have to bear yourself (plus of course the future reputational and other indirect costs, of course). It seems to me this may have been the case in both examples from the original post, so it’s unjustified to parade them as obvious examples of irrational behavior.