Rationality of belief, or: Why Bayesianism is Neither Necessary nor Sufficient for Rationality, Cowles Foundation Discussion Papers 1484

Economic theory reduces the concept of rationality to internal consistency. The practice of economics, however, distinguishes between rational and irrational beliefs. There is therefore an interest in a theory of rational beliefs, and of the process by which beliefs are generated and justified. We argue that the Bayesian approach is unsatisfactory for this purpose, for several reasons. First, the Bayesian approach begins with a prior, and models only a very limited form of learning, namely, Bayesian updating. Thus, it is inherently incapable of describing the formation of prior beliefs. Second, there are many situations in which there is not sufficient information for an individual to generate a Bayesian prior. Third, this lack of information is even more acute when we address the beliefs that can be attributed to a society. We hold that one needs to explore other approaches to the representation of information and of beliefs, which may be helpful in describing the formation of Bayesian as well as non-Bayesian beliefs. 1. Rationality of Belief and Belief Formation One of the hallmarks of the modern era is the belief in rationality. Many writers expected rationality to settle questions of faith, advance science, promote humanistic ideas, and bring peace on Earth. In particular, philosophers did not shy away from arguing what is rational and what is not, and to take a stance regarding what Rational Man should do, believe, and aspire to. By contrast, economic theory in the 20 century took a much more modest, relativist, and even post-modern approach to rationality. No longer was there a pretense to know what Rational Man should think or do. Rather, rationality was reduced to various concepts of internal consistency. For example, rational choice under certainty became synonymous ∗ These notes were written to organize our thinking on the topic. We are aware of the fact that many of the arguments we raise here have been made by others. At this point we do not provide an exhaustive reference list, and we make no claim to originality. Our thinking on these issues was greatly influenced by discussions with many people. In particular, we wish to thank Marion Ledwig, Stephen Morris, and Peter Wakker for comments and references.