Wednesday, 19 November 2014

The ignorance epidemic and bounded rationality

This week's edition of the economist had an interesting article on the knock-on effect the Ebola outbreak is having across Africa. Safari bookings, for instance, are dramatically down on previous years. This seemingly makes no sense: the traditional safari hotspots are further away from and less connected with the effected areas than most European capitals. Through the lens of bounded rationality, however, such an 'ignorance epidemic' is much easier to explain.
       To explain, consider the Jackson family deciding where to go on holiday this year. Suppose that a safari in Tanzania is the best. Then, in the world of the economic textbook, a safari maximizes utility and the Jacksons would set off for Africa. And reality?
        Deciding where to go on holiday is undoubtedly going to be a difficult choice because of the almost limitless possibilities to choose from. So, the Jacksons are not going to maximize utility. The best they can realistically aim for is satisficing. This is the term introduced by Herbert Simon to capture the idea people search until they find a 'good enough' option. The Jacksons may decide that a holiday in Australia is good enough for them.
        Where does Ebola fit into this story? Without Ebola maybe the Jacksons would go to Africa. With Ebola they go to Australia. The crucial point to recognize is that the Jacksons don't lose much either way: in a world of satisficing Africa and Australia are pretty much as good as each other. In other words, the Jacksons don't pay for their 'ignorance'. Africans, however, will pay for the collective ignorance of families like the Jacksons. This is inefficient.
         In a recent paper with Myrna Wooders we show that such inefficiency often comes with stereotyping. Basically, the people doing the stereotyping (the Jacksons in the example) don't lose much by stereotyping. But the people who are stereotyped (Africans in the example) may lose a lot.  The standard economic model is poorly suited to picking up and analysing such things. In particular, the standard model assumes the Jacksons will eliminate bias over time. From a satisficing perspective, however, there is no incentive to do this. The bias will likely persist. 
         Such persistence of bias means that framing effects, which drive things like stereotyping, can have big consequences. It also means the general tendency within economics of wishing away framing effects and coherent arbitrariness is not good enough. Trying telling Africans whose livelihood relies on safari tourists that the 'Ebola framing' is not that important. 
   

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