Kahneman on Irrationality

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The Limits of the Rational-Agent Model

It’s almost like the 18th-century¹ understanding of human faculties is not holding up.

Kahneman on Rationality:

“Irrational is a strong word, which connotes impulsivity, emotionality, and a stubborn resistance to reasonable argument. I often cringe when my work with Amos is credited with demonstrating that human choices are irrational, when in fact our research only showed that humans are not well described by the rational-agent model.”

What is the Rational-Agent Model?
The rational-agent model assumes that humans:

• Make decisions by logically weighing costs and benefits.
• Have stable, consistent preferences.
• Use all available information efficiently.
• Maximize utility (self-interest or happiness).

Where It Fails (via Kahneman & Tversky):

• People rely on heuristics (mental shortcuts) that introduce systematic biases.
• Decisions are shaped by framing effects—how choices are presented.
• Loss aversion: Losses loom larger than equivalent gains.
• People overweight unlikely events (e.g., lottery tickets) and underweight high probabilities.

The takeaway? Humans aren’t irrational, but they don’t operate like hyper-logical economic agents either.

¹ Wealth of Nations by Adam Smith (1776) (likely mixed with John Stuart Mill’s later contributions).