Preferences and rational choice: new perspectives and legal implications.

• Author: Adler, Matthew D.

INTRODUCTION

The fifteen articles in this issue were originally written for a Symposium entitled Preferences and Rational Choice: New Perspectives and Legal Implications, held at the University of Pennsylvania Law School on March 1-2, 2002. The articles focus on the traditional economic account of individual rationality and the implications of recent criticisms of that account for the law. The criticisms in many cases arose by applying the insights and methods of other disciplines to this fundamental problem in the economic literature. The issue brings together economists, philosophers, psychologists, business and finance scholars, and lawyers in an effort to shed light on a question crucial for all these disciplines: what is the correct account of individual human rationality? In this Introduction, we will sketch the contribution the articles collected here make to the ongoing debate on this topic and explain the implications of that debate for the law.

The traditional economic account treats rational agents as seeking to maximize their preferences. The preference-maximization model has long been the dominant approach not only in economics, but also in related fields such as psychology, decision theory, philosophical rational choice, and law and economics. The economic model understands the notion of preference in terms of an agent's ranking of her choices and of the various possible outcomes of those choices. In the simplest case, where the agent knows for certain which outcome will result from each choice, she is enjoined to choose the option leading to the highest-ranked outcome. From a philosophical perspective, the above criterion may seem to leave the notion of "preference" an empty one, since it provides no way to assess the rationality of an agent's choices with respect to some underlying state of satisfaction, and so no way to assess independently whether an agent's choices maximize her preferences. The traditional model does not restrict the content of an agent's preferences. There is nothing irrational, for example, about choosing to spend the day picking blades of grass instead of making money or writing articles.

But the traditional account does place certain formal constraints on the notion of a preference, and these help to make the preference-maximization criterion more robust. In particular, preferences must conform to the following three criteria: (1) completeness--an agent must be able to rank any two items with which she is presented, unless she is indifferent between the two; (2) transitivity--if an agent would prefer an apple to an orange, and an orange to a banana, then it must be the case that she would prefer an apple over a banana; and (3) reflexivity--an agent must be indifferent between an item and an identical item. An agent whose choices do not conform to these conditions would be thought irrational, and her preferences could not be coherently maximized.

What if an agent is choosing under circumstances of incomplete knowledge? How can an agent's choices conform to the above criteria if she does not know, for example, what the results of her choices will be? The traditional model assumes that even if the agent does not know with certainty the outcomes of her choices, she can evaluate the options open to her if she at least knows what the chances are of ending up with one result or another. The model also assumes that the agent's preferences can be measured numerically in terms of utility. The model then stipulates that the utility of a given choice is equal to the utility to the agent of one of the possible outcomes from that choice, discounted by the probability of its occurrence, plus the utility of the next possible outcome from that choice, discounted by its probability of occurrence, and so on for all possible outcomes of a given choice. The best choice for a rational agent, then, is the choice that maximizes her preferences or "utility," adjusting for the probabilities of which she is aware of obtaining specific outcomes.

What intellectual function is performed by the traditional economic account of rationality, and more generally by any model of rational choice? In his article for the symposium issue, Lewis Kornhauser carefully addresses this question, showing how models of rational choice are employed to describe, explain, and evaluate choices, and to facilitate the design of institutions. (1) Much work in experimental psychology, economics, and recently in law addresses the first of these two issues. The crucial question is to what extent the traditional model accurately describes and predicts individual choices. So-called behavioral economists say that the answer is, "Not very well."

Some of the articles make important...