SESSION 6

…IN WHICH WE EXAMINE SOME CRITICISMS AGAINST THE BASIC

PRINCIPLES OF RATIONALITY AND THE USE OF UTILITY
READINGS

• 1. Chapters 1 and 2 of On Ethics and Economics by Amartya Sen.

• 2. Amartya Sen (1977): “Rational Fools: A Critique of the Behavioural Foundations of
Economic Theory” . Philosophy and Public Affairs, Vol 6 No 4.
BASICS OF WELFARE ECONOMICS

• Amartya Sen characterized welfare economics as having the following characteristics:

• 1. Welfarism: Social welfare is a function of personal utility levels alone.
• 2. Ordinalism: Only ordinal utility functions to be used, not cardinal.
• 3. Noncomparable utilities: Cannot compare the utility levels of individuals.
• 4. Pareto preference rule: If everyone had at least as much utility in situation X
compared to situation Y, and someone had more utility in X than Y, X should be chosen.
• We examine his criticisms of these fundamental aspects of economic theory.
CRITICISING UTILITARIANISM AND FOCUS ON
UTILITY
• The Utility Monster: Thought experiment by Robert Nozick to criticize utilitarianism.
• Imagine a being that receives more utility per unit of good consumed than others (A
“utility monster”). According to Nozick, utilitarianism would mean giving this monster a
majority of utility as compared to others, justifying tremendous inequality in outcomes.
• Criticisms: Derek Parfitt believes it is inconceivable that you might have individuals who
experience a million times more utility than others.
• (But Nozick’s thought experiment does signify a very serious problem. See graph done in
class).

UTILITARIANISM
AND RIGHTS
Utilitarianism – and focus on utilities alone – is a
consequentialist outcome. The worthiness of the end state
depends on the outcomes. Pre-given rights, and
adherence to pre-given rights, is not as important.
Bentham believed there is no such thing as “natural”
rights, because all rights are the creation of the state.
Called natural rights “Nonsense” and “nonsense on stilts”
(while criticising French Declaration of Rights of Man).
Criticised by Nozick.
• Rights are, then, the fruits of the law, and of the law
alone. There are no rights without law—no rights
contrary to the law—no rights anterior to the law. Before
the existence of laws there may be reasons for wishing
that there were laws—and doubtless such reasons
cannot be wanting, and those of the strongest kind;—but
a reason for wishing that we possessed a right, does not
constitute a right. To confound the existence of a reason
for wishing that we possessed a right, with the existence
of the right itself, is to confound the existence of a want
with the means of relieving it. It is the same as if one
should say, everybody is subject to hunger, therefore
everybody has something to eat.
 AMARTYA SEN AND CRITICISM OF
UTILITARIANISM
(FROM SEN, 1979)
State X State Y State Z
Person A’s utility 4 7 7
Person YBs utility 10 10 10

In simple ranking (and if we assume cardinal utilities), State Y preferred to State X.

Assume in State Z, Person A gets drugs to forget about hunger experienced in State X. Or is told that suffering in
current life will benefit you later (either in heaven or rebirth), and hence feels that state Z is better than X.
Z preferred to X, and Z indifferent to Y. But is Z truly a better state than X?
(Amartya Sen uses example of torture. But we don’t even need to go that far).
If we focus only on utilities, even when assuming we can compare and measure all utilities, there is a still real problem
in neglecting things like solidarity with groups, political convictions, meaningful improvements in lives etc).
(This has relevance for debates on health. Should we use self-reported perceptions to evaluate global health?)
 CHANGES IN
INDIVIDUAL’S
OUTCOME
Imagine person B suffers a change in the utility
function, and schedule of marginal utility reduces
(what might cause such a change?)

Loses some utility. Should they be compensated for

loss in utility?

Utilitarianism would say no, and would advocate for

increasing the utility of A.
 UTILITARIANISM
AND AGENCY
Agency: the ability for individuals to be free
enough to undertake actions or interventions to
achieve some goals.

Imagine situation where you will get maximum

utility, but you cannot do anything to achieve it
(like in the Matrix). Will you accept this
outcome?
 MARX’S CRITIQUE OF BENTHAM
• “The principle of utility was no discovery of
Bentham. …This nature itself is not to be deduced
from the principle of utility. Applying this to man, he
that would criticize all human acts, movements,
relations, etc., by the principle of utility, must first
deal with human nature in general, and then with
human nature as modified in each historical epoch. “
• (In Capital, Vol 1, footnote on pg 758)
• Let us suppose that we had produced as human
beings… (1) In my production… I would experience
my personality. . . . (2) In your use or enjoyment of
my product I would have the immediate satisfaction
and knowledge in my labor I had gratified a human
need. . . (3) . . . I would have directly confirmed and
realized my authentic nature. . . . This relation would
be mutual: what applies to me would also apply to
you. (Marx, 1844, 277–8.)
• Q1) An epidemic threatens lives of 600 people. Two alternative, mutually exclusive plans are
proposed.
1.A) 400 people will die.
1.B) 1/3 chance no one will die and 2/3 chance that 600 people will die.
Which would you choose, if you had to choose only one plan of action?

Q2. Imagine you purchase a ticket for a movie that costs Rs 200. When you arrive for the movie,
you realise you have lost the ticket. Will you purchase a new ticket?
CRITIQUE OF RATIONALITY

• What is “rational” about rational individuals?

• How do we define rationality? What does it imply for human behaviour?
• Is it a worthwhile paradigm to think about behaviour?
• Should be thought less as a way of characterizing behaviour, more as a causal explanation
of social phenomena that arise as if a bunch of self-interested individuals are maximizing
their own welfare and utility.
RATIONAL CHOICE

• Individuals have a utility function that they know of. They are self-interested and seek
only to maximise their own welfare.
• Their utility increases through the consumption of discrete goods. They know how utility
changes as consumption changes.
• Their preferences over goods are well-defined. Complete, reflexive and transitive.
• Their preferences do not change depending on others’ consumption.
• Their preferences do not change depending on how choices are presented to them.
• A person considered “rational” if choices are consistent. That is, if faced with the same
choices repeatedly, would exercise the same preferences (ceteris paribus).
• Only way to understand an individual’s views and attitude is through alternatives.
• Idea goes back to Adam Smith, that individuals acting in self-interest will bring an
economy to equilibrium without any external actor.
• But did Smith genuinely believe self-interest is the only major motivation for individuals’
actions?
DOES SMITH FOCUS ONLY ON SELF-INTEREST?

• In Theory of Moral Sentiments:

• “However selfish man may be supposed, there are evidently some principles in his nature,
which interest him in the fortune of others, and render their happiness necessary to him,
though they derive nothing from it except the pleasure of seeing it.”
• Sympathy, generosity, public spirit also drives individuals’ actions. Reasoning can prevent
us from being uncaring. “Established rules of behaviour” and social conventions also
influence actions, not just self-interest. (read Sen, 2010 and 2011).
• Smith DID NOT reduce individuals to self-interest. His theory of justice depends on role of
“impartial spectator”, i.e stepping outside one’s own self-interest to view and judge other
situations.
SELF-INTEREST AND THE MARKET ECONOMY

• Sen: Smith spoke about self-interest only in context of market activities and trade. If one
were to talk about trade, using self-interest to describe and analyse trade is sufficient.
Does not mean it necessarily implies that self-interest is all that is required for welfare.
• Trust is important as well:
• Nuanced view of Smith: individuals are not wholly or completely self-interested.
• Self-interest is important, and powerful (maybe even natural). Revolutionary idea
considering importance of kings and monarchies, that individuals can organize their own
affairs themselves.
• If institutions strong, if unfair acts curtailed, if speculation and certain activities regulated,
social welfare improved by markets made up of individuals actions and agents.
• Marx: Self-interest not natural, it is idea that best benefits capitalists. Can never have
social welfare because inherent logic of capital will ensure beneficial institutions – such
as regulation, prevention of monopolies – never emerge.
QUESTIONS OF COMMITMENT

• Sometimes, individuals make choices and undertake actions even if it reduces their welfare.
• Sympathy: we undertake some actions to help others because we know we feel good when
others are better-off. Our utility and welfare increases when others’ welfare increases. This
is an externality, but still termed as rational if aim is to increase utility.
• Commitment: we undertake an action or a choice even knowing that doing so reduces our
welfare. Individual is undertaking a choice, evaluating outcomes, expressing preference, but
reducing welfare and knows that they are doing so.
• These choices involve questions of morals and prior beliefs, not simply utility and
satisfaction.
• Examples: most political actions. Hunger strikes, protests etc. Collective action, such as
union strikes, collective bargaining etc, where individuals are motivated by more than just
incentives.
• Leif Johansen: “Economic theory in this, as well as in some other fields, tends to suggest
that people are honest only to the extent that they have economic incentives for being so.
This is a homo oeconomicus assumption which is far from being obviously true, and
which needs confrontation with observed realities. No society would be viable without
some norms and rules of conduct. Such norms and rules are necessary for viability
exactly in fields where strictly economic incentives are absent and cannot be created.”
• Point of talking about commitment: economic incentives and “Rationality” commonly
understood may not be the only thing driving individual actions. People and societies
motivated by much more.

• Arrow’s Impossibility theorem arrived at by assuming individuals vote only for self-
interest. But not always true. Voting behaviour can be driven by non self-interested goals,
and ideas of commitment to larger questions.
• Q3. An epidemic threatens the lives of 600 people. Two mutually exclusive plans are proposed.
• 3.A) 200 people will be saved.
• 3.B) There is a 1/3 chance that 600 people will be saved and a 2/3 chance that no one will be
saved.
• You must choose one plan of action. Which would choose?

• Q4. Imagine you want to watch a movie, and the ticket costs Rs 200. You arrive for the show,
but on arriving you realise that you have lost a Rs 200 note you took to buy the ticket. Will you
purchase a ticket?
COMPARE THE QUESTIONS
• Q1) An epidemic threatens lives of 600
people. Two alternative, mutually
exclusive plans are proposed.
1.A) 400 people will die.
1.B) 1/3 chance no one will die and 2/3
chance that 600 people will die.
Which would you choose, if you had to
choose only one plan of action?
• Q3. An epidemic threatens the lives of 600
people. Two mutually exclusive plans are
proposed.
• 3.A) 200 people will be saved.
• 3.B) There is a 1/3 chance that 600 people
will be saved and a 2/3 chance that no one
will be saved.
• You must choose one plan of action. Which
would choose?
ARE INDIVIDUALS ACTUALLY RATIONAL?

• In questions 1 and 3, the choices are technically the same. 1.A and 3.A involve no risk (but are
the same outcomes), while 1.B and 3.B involve some risk (but are the same outcomes). A
rational individual should be consistent, choosing 1.A and 3.A or 1.B and 3.B.
• In an experiment, physicians at Stanford University Hospital were divided into two groups,
Group 1 asked question1, Group 2 asked Question 3.
• 78% of physicians in Group 1 chose 1.B (the risky option), while 72% in group 2 chose 3.A
(the safe option). Since randomly distributed, can safely say that Group 1 is not inherently
more risk-taking than group 2.
• Data does not rule some individuals making “rational” choices, but does indicate that at least
half of physicians would make inconsistent choices.
• Choice of framing question led to inconsistency. In conditions of uncertainty where losses
highlighted, we go for option to reduce loss (even though there is risk of enlarging the
actual loss). In conditions of uncertainty with gains highlighted, would prefer to go for
the guaranteed gain (instead of taking the risk that more could be saved).

• Even when question given simultaneously to students of game theory, a lot of students
made inconsistent choices.
• In question regarding price of ticket, both options are technically the same. Irrespective of
whether you have lost the ticket or lost the Rs 200 note, you will either end up with a net
loss of Rs 200 and not seeing the show, or seeing the show and ending up with a net loss
of Rs 400.
• In experiment, 46% of respondents said they would purchase a ticket after losing the
ticket, while 88% said they would purchase ticket after losing the Rs 200 note.
• Greater propensity for people to purchase ticket after losing money rather that purchasing
ticket after losing ticket.
• Decision makers maybe factoring in cost of previously purchased ticket in total cost of
purchasing new ticket, but not factoring in cost of lost Rs 200 note. This pattern of
thinking called mental accounting.
• Individuals may think that losing the Rs 200 note is unconnected event, and so will
readily buy ticket after losing Rs 200 note.
• All these biases are studied in field of behavioural economics, and indicate that
individuals may not always subscribe to the very rigorous demands of rationality.