5 - The Rationality of Beliefs

Summary

Rational beliefs need not be truth-tracking nor adhere strictly to basic logical or statistical-inference principles. They must simply be appropriate to the attainment of the individual’s purposes in specific contexts. We analyze various “errors” that behavioral economists have supposedly discovered in belief formation. Specifically, we examine supposed errors related to imperfect logical deduction, the conjunction fallacy (including the famous “Linda problem”), availability bias, overconfidence bias, and distorted salience. In each case we show that the standard behavioral analysis is too simple and that many of their behaviors qualify as inclusively rational. The fundamental error of behavioral analysts is to expect that universal, abstract methods of belief formation will be appropriate for guiding all concrete choices.