Real and Apparent Deviations From Rational Choice

ABSTRACT This paper offers a taxonomy of real and apparent deviations from rationality. The taxonomy is based on three axes of divides—whereas the axes are successive refinements. The outermost‐axis divide delineates “anxiety‐based choices” from “anxiety‐free choices.” Anxiety‐based choices are real deviations such as the Allais and Ellsberg paradoxes and superstitions. The intermediate‐axis divide focuses on anxiety‐free choices, distinguishing “reference‐independent choices” from “reference‐dependent choices.” Reference‐dependent choices are only apparent deviations from rationality. The innermost‐axis divide focuses on reference‐dependent choices, identifying three families of reference‐dependent choices. The first family is the set of norms—rules and heuristics—that act as institutions to ensure optimal decisions. Rules include precommitments adopted to avert temptations. Heuristics include generalizations adopted to economize cognitive cost (bounded rationality). The second family is the set of principles of justice and propriety. The ultimatum game illustrates justice. Loss aversion can be argued to arise from scolding oneself for failing to be proper and doing the right thing. The third family is the set of contexts that signal the relevant attachments—such as bonding with loved ones or persevering with an aspirational goal. Examples include the endowment effect and assessments related to happiness.