Are people rational? Quick thinking and fairness

Economics has long pictured people as careful choosers who think before they act and look after their own interests. Is that what you are like? Try three short puzzles before you read on.

Did a quick answer pop into your head each time? Those quick answers are wrong, and you are in good company. In research published in 2005, 3,428 people tried the original puzzles, most of them university students. A third got all three wrong. Only 17% got all three right.

This finding is robust. Researchers have since given these puzzles to tens of thousands more people. The quick wrong answers keep turning up, though how often depends on who is tested. In 2023, the researcher behind that 2005 work and a colleague reported 59 more studies, mostly of the bat-and-ball puzzle, with over 72,000 people. Many stuck with the quick answer even when shown the arithmetic that proves it wrong.

Economics starts from a simple picture of a person, called the rational chooser. Textbooks also call this person homo economicus, or “economic man”. This person:

• weighs the costs and benefits of each option;
• responds to incentives (rewards and penalties that change what people do);
• looks after their own interests, caring only about what they themselves get.

The puzzles tested careful thinking. The game below, the ultimatum game, tests the last point: do people care only about their own money? A proposer offers to split some money with a responder, who accepts or rejects. A rejection leaves both with nothing.

The game shows where the model bends. Many people care about fairness as well as money, and will give up money to punish a split they think is unfair.

The clearest break with the model is the responder who turns down money. Generous offers prove less. If you expect a low offer to be rejected, offering more is the smart self-interested move.

This finding is robust too. Researchers at a university in Germany published the first study of the game in 1982. Dozens of experiments in several countries have since found the same, even with stakes of 100 dollars (in 1996) and 400 dollars (in 2000).

The finding has limits. When a 2011 study in villages in India put about a year’s income at stake, rejections almost disappeared. A study published in 2001 took the game to 15 small communities around the world, from hunter-gatherers to herders. In some, people almost never turned down a low offer; in others, they turned down even generous ones. But in none did people behave as the purely self-interested model predicts.

So is the rational chooser model wrong? It is a model: a simplified picture that leaves out detail on purpose, like a map. A map that showed every tree would be no use. We judge a model by how well it predicts, not by how real it looks. This one still predicts a lot. For example, when the price of something rises, people tend to buy less of it.

Where the model falls short, behavioural economics (economics that uses psychology to study how people really choose) fills the gaps. It is now a recognised part of economics. In 2002 the psychologist Daniel Kahneman shared the Nobel prize in economics. In 2017 Richard Thaler won it for his work in behavioural economics.