OptimallyIrrational For a long time, economists have assumed that we were cold, self- centred, rational decision makers – so-called Homo economicus; the lastfewdecadeshaveshatteredthisview.Theworldweliveinandthe situations we face are of course rich and complex,revealing puzzling aspectsofourbehaviour.OptimallyIrrationalarguesthatourimproved understanding of human behaviour shows that apparent ‘biases’ are goodsolutionstopracticalproblems–thatmanyofthe‘flaws’identi- fiedbybehaviouraleconomicsareactuallyadaptivesolutions. Pagedeliversanambitiousoverviewoftheliteratureinbehavioural economicsand,throughtheexpositionoftheseflawsandtheirmeaning, presentsasortofunifiedtheoryofbehaviouralism,cognitivepsychol- ogy and evolutionary biology. He gathers theoretical and empirical evidence about the causes of behavioural ‘biases’ and proposes a big pictureofwhatthedisciplinemeansforeconomics. lionel page is a professor of economics and the Director of the Behavioural and Economic Science Cluster at the University of Queensland.He has worked on a wide range of topics in behavioural economics, such as risk preferences, social preferences and strategic behaviour. Published online by Cambridge University Press Published online by Cambridge University Press Optimally Irrational The Good Reasons We Behave the Way We Do LIONEL PAGE UniversityofQueensland Published online by Cambridge University Press ShaftesburyRoad,Cambridgecb28ea,UnitedKingdom OneLibertyPlaza,20thFloor,NewYork,ny10006,USA 477WilliamstownRoad,PortMelbourne,vic3207,Australia 314–321,3rdFloor,Plot3,SplendorForum,JasolaDistrictCentre, NewDelhi–110025,India 103PenangRoad,#05–06/07,VisioncrestCommercial,Singapore238467 CambridgeUniversityPressispartofCambridgeUniversityPress&Assessment, adepartmentoftheUniversityofCambridge. WesharetheUniversity’smissiontocontributetosocietythroughthepursuitof education,learningandresearchatthehighestinternationallevelsofexcellence. www.cambridge.org Informationonthistitle:www.cambridge.org/9781009209199 doi:10.1017/9781009209175 ©LionelPage2023 Thispublicationisincopyright.Subjecttostatutoryexceptionandtotheprovisions ofrelevantcollectivelicensingagreements,noreproductionofanypartmaytake placewithoutthewrittenpermissionofCambridgeUniversityPress&Assessment. Firstpublished2023 AcataloguerecordforthispublicationisavailablefromtheBritishLibrary. isbn978-1-009-20919-9 Hardback isbn978-1-009-20920-5 Paperback CambridgeUniversityPress&Assessmenthasnoresponsibilityforthepersistence oraccuracyofURLsforexternalorthird-partyinternetwebsitesreferredtointhis publicationanddoesnotguaranteethatanycontentonsuchwebsitesis,orwill remain,accurateorappropriate. Published online by Cambridge University Press Contents ListofFigures pagevii ListofTables ix Preface xi parti settingthescene 1 TheHomoEconomicusModel 3 2 ThePsychologyofBiasesinHumanBehaviour 12 3 TheLogicofaScientificRevolutioninEconomics 17 4 EvolutionandtheLogicofOptimisation 24 partii individualdecisions 5 RulesofThumbandGutFeelings 41 6 ReferencePointsandAversiontoLosses 62 7 SensitivitytoProbability 87 8 TheRandomnessofChoices 101 9 Impatience 114 partiii socialinteractions 10 KindnessandReciprocity 129 11 EmotionsandCommitment 159 12 SocialIdentity 174 v Published online by Cambridge University Press vi Contents 13 ImpressionManagement 205 14 SelectionofDelusion 224 partiv epilogue 15 Rationality? 247 Bibliography 281 Published online by Cambridge University Press Figures P.1 Hypotheticalflowerswithpetalsprogressivelyadded followingrotations pagexii P.2 Flowerpatternsfordifferentrotationsclosetothegoldenratio xiii 4.1 “Kludged”flatfish.PhotofromTomNicholsonlicensedunderCC BY-NC4.0. 30 5.1 BalldetectionbyrobotsintheRobocupcompetition.Reproduced fromAsharetal.(2015). 48 5.2 Thegazeheuristic.ReproducedfromPoddiakov(2013). 49 5.3 Examplesofoverfittingandunderfitting. 52 6.1 A hypothetical value function. Reproduced from Kahneman and Tversky(1979). 67 6.2 WhyanS-shapecanbeanoptimalsolutiontotheproblem ofperception 75 6.3 Optimal value function. Reproduced from Rayo and Becker (2007). 79 7.1 Theprobabilityweightingfunctionfromprospecttheory. 93 9.1 Exponential,hyperbolicdiscountingandquasi-hyperbolic discountingfunctions.ReproducedfromBernsetal.(2007). 119 10.1 Prisoner’sdilemmagameasabriefcaseexchange.Image byChrisJensenandGregRiestenberg 139 12.1 StagHuntGame.ImagebyChrisJensenandGregRiestenberg. 197 13.1 Higher-orderbeliefsinthesuitcasegame 218 13.2 HarryandSallynavigatinganambiguousromanticoverture 221 vii Published online by Cambridge University Press Published online by Cambridge University Press Tables 7.1 Allais’gamblesdecomposedtorevealthesubstitution ofacommonelement page91 7.2 Aseriesofgamblestoinvestigateprospecttheory’spredictions 94 11.1 ThegameofchickeninRebelwithoutaCause 163 14.1 Costswhendecidingtoprotectoneselfornotfromadanger 227 ix Published online by Cambridge University Press