By Antora Bhattacharya (AB) & Rhea Sinha (RS)
We are extremely pleased to share with you our interview with Dr. Jorgen Weibull (JB), professor at the Stockholm School of Economics. His ground-breaking research on morality in economics is intriguing and provides ample reasons to ponder over the basic assumptions of economic models. Read on to rethink economics!
RS: A lot of your work has been on evolutionary game theory and the application of game theory to the Darwinian model. What inspired you to take up such a field in economics?
JW: I was always intrigued by evolution and the beauty that nature and life has to offer. My fascination with this evolutionary phenomenon propelled me further to take up evolutionary game theory academically. I read up on this topic and I realised you don’t have to rely on fully rational agents as proposed by conventional Economic theories. It became imperative to consider that there are other forces that move us to behave in a particular way and to survive. I made an attempt to lay these other factors bare so that I could view them in a more structured manner. With the help of others and also myself, I was able to prove new results and was able to relate ‘economic thinking’ as a dominant strategy. There were many questions that needed to be kept into consideration such as, ‘What is a dominant strategy?’, ‘What is rationality?’, ‘What is common knowledge?’ and ‘What does evolution say?’. I think for me it is very important to base Economics in something more fundamental. This is because Economics is all about human species interacting with each other which indeed is a more complex phenomenon than what most Economic theories pre assume. We are biological creatures and once we gain insight about our various behaviours, we would go a long way in this discipline.
AB: Economics is called a science of assumptions. Sometimes, it is critiqued to be somewhat inapplicable in real life situations. How do we, as students, learn to bridge the gap between theoretical knowledge and the practical applications of these theories and ideas?
JW: This is a very important and big question and I don’t think I’m the right person to give a full answer. I think economics is extremely complex and a difficult field. It studies complex creatures like humans and what they do together. They can create companies, trade in markets; they can make families, organizations. It is very hard to make predictions about human behavior. Economics can do many things but we have much to learn. We could simply apply economic models, look at the data and see if we can explain the data. Sometimes, it works surprisingly well and sometimes, not well at all. Some market predictions of economists are amazingly accurate. For example, game theory is an amazing tool to predict the outcomes of auctions. It is powerful in some fields. In other fields, it’s lacking and there are several reasons for that. One reason is, one has to understand human motivation and it’s not enough to just think about your material self interest. Another reason is cognitive limitations. We are not infinitely smart. In economics we assume that we are infinitely smart. What is the defense for that assumption? If you want to look into that, you can read Milton Friedman’s ‘Methodology of Positive Economics’. The argument is evolutionary. It says that if firms behave not in a way to maximize their expected profits, they would be out of business or would change their practice. It says that we believe that well functioning markets will sort themselves out, like evolution. For example, if the other firms in a market raise their prices, so will an individual firm. This could maybe be an approximation for what could best be applied in game theoretic terms. We definitely need to bridge the gap.
RS: You have used the word ‘motivation’ repeatedly. Human beings are inherently motivated and that is what guides decisions and that is what we call a rational human being. So if you say that morality plays an important role in taking decisions, what would be essentially irrational in that case?
JW. By using the term ‘irrationality’ in economic theories, we don’t necessarily mean any particular way of action but rather that the person isn’t coherent or consistent in their actions. You should have what are called ‘transitive preferences’. This means if I prefer A over B and B over C then I should logically prefer A over C as well. If you have logic in your preferences, then there will be a utility function, which you would want to maximise. Economic theories work on assumptions rather than hard facts. We can look at ‘Homo Moralis’ which suggests that you care about what you do. For example “it’s not right to pollute here if I can avoid it, even if I understand that my contribution to pollution wouldn’t be significant due to my small size”, this suggests that you are rational. Rationality doesn’t say that it should be your material consequence that drives your actions. It simply says that there should be coherence in your behaviour and there should be some underlying structure in your behaviour. This revelation surprised me as well, I couldn’t believe it. We tried to make sense of what was happening through mathematics. We can try to think of this, as a form of morality. Essentially, if you don’t contradict yourselves and you have transitive preferences then that would fulfill the definition of rationality.
RS: When we hear the word morality, it’s often linked to a positive notion or idea. Also we just discussed it is evident that we link rational behaviour with consistency in thoughts and actions. If we extend this argument to that of the situation of a prisoner or any criminal, it is very much possible that he has abnormal thoughts in a consistent manner. So even though these thoughts aren’t socially acceptable, there is an element of consistency. Does this mean that the person is still rational?
JW: So let’s look at it from a revealed preferences point of view like that in Economics. You give him a set of choices between different actions and if he has transitive preferences, it is a mark of rationality. If he’s consistent with those choices then it would still be considered rational even if the choices are considered strange or abnormal. If we want to understand rationality from a deeper sense then there is something called savage rational by Leonard Savage. He wrote a book on the foundations of statistics. His notion was that by rationality we don’t only mean that we aren’t contradicting our choices but also in addition to transitive preferences we form beliefs that are consistent. So if I form a populist belief and then following that I get new information, I should be able to integrate that into my new belief and ideas. Rationality means I’m able to use Bayes’ law and updates. So using this new information I should be capable of updating my beliefs which can be positive. Therefore if this prisoner has strange views about society and what goes on in society then Savage would say that he’s not rational because his beliefs contradict the information he has. I remember that we had a terrorist act going on Stockholm and that guy had killed people by driving trucks into crowds. And I heard his trial and what he had said; his beliefs were completely false about Sweden and the nation. So maybe he was consistent in his awful thoughts of killing people but he wasn’t consistent in the information he was acting on. His thoughts were indoctrinated.
AB: In most undergraduate economics courses in India, game theory is introduced quite late into the program. For those who are eager to learn more about this topic earlier than it is taught, do you have any suggestions or recommendations regarding books or courses to access?
JW: I think you should study it early. Nowadays, universities in many countries teach it earlier. When I started teaching game theory, students at the masters’ level didn’t know what Nash Equilibrium was. Now, it is taught differently. There is a very nice book by Avinash Dixit, who is of Indian origin at Princeton, and Barry Nalebuff. It is called ‘Thinking Strategically’. They are very clever people and know game theory very well, but the book is written quite informally. I would think that’s a good start. There are many books in game theory for different levels.