In the first of this three-post series I offered a sound file of Dan talking about the limits of rationality when devising and regulating public services.

Dan Ariely 3 of 3: Trust and Healthcare Reform

Healthcare reform choked by lack of trustIn the first of this three-post series I offered a sound file of Dan talking about the limits of rationality when devising and regulating public services.

In the second, we explored how  Treasury’s un-trustworthiness dealing with TARP and the financial meltdown has led to social anxiety and depression.

While writing that second post it occurred to me if our elected and appointed officials been truthful and upfront in their dealings with $700b bailout, we’d already have a healthcare reform bill.

It also occurred to me that we hold public servants to a higher standard than CEOs of healthcare. When healthcare execs earn blood money by standing between us and our doctors, we shrug it off by saying “Hey, that’s just capitalism,” or “Oh well, cost of doing business,” but when our elected officials stand between us and our doctors we get nuts because that’s rationing.

What Ariely has to say about our beloved invisible hand of the market

In the updated version of Predictably Irrational, Ariely observes about his own profession:

Predictably IrrationalRational economics has always been the basis for setting up policies and designing our institutions. What’s wrong with that? Neoclassical economics is built on very strong assumptions that, over time, have become ‘established facts.’   Most famous among these are that all economic agents (consumers, companies, etc., are fully rational, and that the so-called invisible hand works to create market efficiency). To rational economists, these assumptions seem so basic, logical, and self-evident that they do not need any empirical scrutiny.

Building on these basic assumptions, rational economists make recommendations regarding the ideal way to design health insurance, retirement funds, and operating principles for financial institutions. This is, of course, the source of the basic belief in the wisdom of deregulation: if people always make the right decisions, and if the “invisible hand” and market forces always lead to efficiency, shouldn’t we just let go of any regulations and allow the financial markets to operate at their full potential?

On the other hand, scientists in fields ranging from chemistry to physics to psychology are trained to be suspicious of ‘established facts.’ In these fields, assumptions and theories are tested empirically and repeatedly. In testing them, scientists have learned over and over that many ideas accepted as true can end up being wrong; this is the natural progression of science. Accordingly, nearly all scientists have a stronger belief in data than in their own theories. If empirical observation is incompatible with a model, the model must be trashed or amended, even if it is conceptually beautiful, logically appealing, or mathematically convenient.

Unfortunately, such healthy scientific skepticism and empiricism have not yet taken hold in rational economics, where initial assumptions about human nature have solidified into dogma. Blind faith in human rationality and the forces of the market would not be so bad if they were limited to a few university professors and the students taking their classes. The real problem, however, is that economists have been very successful in convincing the world, including politicians, business people, and everyday Joes not only that economics has something important to say about how the world around us functions (which it does), but that economics is a sufficient explanation of everything around us (which it is not). In essence, the economic dogma is that once we take rational economics into account, nothing else is needed (emphasis added).

In sum, we trust theories more than facts.  No wonder we’re in such a quandry.

About Tamela M. Rich

From Charlotte, NC, Tamela writes books, articles, speeches and presentations for business professionals. From "the road" she writes about the people, places and experiences she discovers and the life lessons she learns from them. Invite her to share some of her lessons from the road at your next event!

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  1. This is great perspective. I love things that bring large, confusing issues into simple context. And i especially like the conclusion here – that we often subscribe to theory before face – a major problem, no doubt, in all parts of our lives.

  2. I struggled with this throughout business school. How could economics be reliable if the whole thing rested on a faulty core assumption – that human beings acted rationally?

    The Black-Scholes Formula/Equation, on which most derivatives pricing is based, has the same problem – it’s an elegant mathematical formula based on a faulty premise – that stocks move according to Brownian motion which is based on the Normal distribution. Clearly they don’t.

    Astronomers and Physicists are much more flexible in their thinking about their core assumptions. See one “String Theory” for example.

  3. This is why economics, to me, is not a science–all these theories are based on the faulty assumption that humans act rationally (kudos to Dasan for nailing it in his comment). I live with a mathematician turned firmware engineer, so I am familiar with the rigor needed when examining models and theories in the pure sciences. All comes into question if the data don’t support the model/theory. But we love to believe in theories because we find their elegance and beauty and self-fulfilling prophecy aspects comforting. Sadly, however, that doesn’t make them true.

  4. a concept, ok, theory, that will reveal itself out of the conundrums that you point out is the one called collective consciousness … we actually don’t know how to measure most of the influences that make up this world, even the facts are questionable, because they are facts only at lower levels of consciousness, or lower levels of understanding …

    rationality and its opposite are quite naive concepts in terms of higher levels of mind, they brought us this far, but cannot get us home …

    there are a lot of concepts in this blog post, and the earlier pieces … without backing it up with argument, i will offer than many of them need their roots examined for actual viability .. cause and effect are not what they seem, in short … more than that is an essay that i don’t wish to write ..

    thanks for all of this … enjoy, gregory

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