Paradox of Rationality

What’s being “rational” in a game? Economists say the rational thing to do is backward induction. You start at the end, and work your way backwards, seeing the steps taken to get to the best outcome.

But...that’s not what we do most of the time, and that might be a good thing. The paradox of rationality is that players who make less-than-rational moves get better payoffs than if they had made the “rational” choice...as in, using the rationality of backward induction to make the move.

Basically, it means that being rational isn’t always the smartest move, based on how economists define “rational.”

The prisoner’s dilemma is a great example of the paradox of rationality. That’s when there are two people in separate rooms with police, both being given the choice: to rat out, or not to rat out. Based on what the other person will do, the rational choice is to rat on your friend...since their most rational choice is to rat on you. If you assume the other guy will tell on you, you’re better off telling on them. Backward induction rationality.

So what if one guy rats out the other, but the other doesn't? Well, the irrational guy, being so nice and all, protecting his friend...gets a worse outcome. That’s the whole reason both rational guys would tell on each other...so they don’t end up in that situation.

But what if both were irrational, and neither ratted on the other? In this case, both get the highest payoffs on the board. If both are irrational, they get the highest combined payoffs. Which seems like a paradox, since the choice was irrational. Whoaaaa, Keanu.