Researchers argue about the extent to which people are rational, but the real problem with the concept of the rational individual is that our desires, preferences and decisions are not primarily the result of individual thinking. Because economics and much of cognitive science takes the unit of analysis to be an independent individual, they have difficulty accounting for social phenomena such as financial bubbles, political movements, panics, technology trends, or even the course of scientific progress.
Near the end of the 1700s, philosophers began to declare that humans were rational individuals. People were flattered by being recognized as individuals, and by being called rational, and the idea soon wormed its way into the belief systems of nearly everyone in upper-class Western society. Despite resistance from church and state, this idea of rational individuality replaced the assumption that truth only came from god and king. Over time, the ideas of rationality and individualism changed the entire belief system of Western intellectual society, and today it is doing the same to the belief systems of other cultures.
Recent research data from my lab and other labs are changing this argument, and we are now coming to realize that human behavior is determined as much by social context as by rational thinking or individual desires. Rationality, as economists use the term, means that an individual knows what he or she wants and acts to get it. But this new research shows that in this regard, social network effects often, and perhaps typically, dominate both the desires and the decisions about how individuals act.
Recently, economists have moved toward the idea of "'bounded rationality'," which means that we have biases and cognitive limitations that prevent us from realizing full rationality. Our dependence on social interactions, however, is not simply a bias or a cognitive limitation. Social learning is an important method of enhancing individual decision-making. Similarly, social influence is central to constructing the social norms that enable cooperative behavior. Our ability to survive and prosper is due to social learning and social influence at least as much as it is due to individual rationality.
These data tell us that what we want and value, as well as how we choose to act in order to obtain our desires, are a constantly evolving property of interactions with other people. Our desires and preferences are mostly based on what our peer community agrees is valuable, rather than on rational reflection based directly on our individual biological drives or inborn morals.
For instance, after the Great Recession of 2008, when many houses were suddenly worth less than their mortgages, researchers found that it only took a few people walking away from their houses and mortgages to convince many of their neighbors to do the same thing. A behavior that had previously been thought nearly criminal or immoral, i.e., purposely defaulting on a mortgage, now became common. Using the terminology of economics, in most things we are collectively rational, and only in some areas are we individually rational.
By mathematically modeling the social learning and social pressure between people my colleagues and I have been able to accurately model and predict crowd phenomena such as this cascade of mortgage defaulting. Importantly, we have also found that it is possible to shape real-world crowd behaviors by using social network incentives that alter the connections between people, and that these social incentives are much more effective than standard individual economic incentives. In one particularly striking example we were able to use social network incentives to deflate a 'groupthink' bubble among foreign exchange traders and consequently double the return on investment of the individual traders.
So instead of individual rationality I believe that we have common sense. The collective intelligence of a community comes from the surrounding flow of ideas and examples; we learn from others in our environment, and these others learn from us. Over time, a community with members who actively engage with each other creates a group with shared, integrated habits and beliefs. When the flow of ideas incorporates a constant stream of outside ideas as well, then the individuals in the community make better decisions than they could on their own.
This idea of a collective intelligence that develops within communities is an old one; indeed, it is embedded in the English language. Consider the word "kith," familiar to modern English speakers from the phrase "kith and kin." Derived from old English and old German words for knowledge, kith refer to a more or less cohesive group with common beliefs and customs. These are also the roots for "couth," which means possessing a high degree of sophistication, as well as its more familiar counterpart, uncouth. Thus, our kith is the circle of peers (not just friends) from whom we learn the "correct" habits of action.
Our ancestors understood that our culture and the habits of our society are social contracts, and that both depend primarily upon social learning. As a result, observing the attitudes, actions, and outcomes of peers, rather than by using logic or argument is how we learn most of our public beliefs and habits. Learning and re-enforcing this social contract is what enables a group of people to coordinate their actions effectively. It is time that we dropped the fiction of individuals as the unit of rationality, and recognized that we are embedded in the surrounding social fabric.