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Thursday, May 11, 2023

Reputational Rationality Theory

Dorison, C. (2023, March 29). 


Traditionally, research on human judgment and decision making draws on cognitive psychology to identify deviations from normative standards of how decisions ought to be made. These deviations are commonly considered irrational errors and biases. However, this approach has serious limitations. Critically, even though most decisions are embedded within complex social networks of observers, this approach typically ignores how decisions are perceived by valued audiences. To address this limitation, this article proposes reputational rationality theory: a theoretical model of how observers evaluate targets who do (vs. do not) strictly adhere to normative standards of judgment and choice. Drawing on the dual pathways of homophily and social signaling, the theory generates testable predictions regarding when and why observers positively evaluate error-prone decision makers, termed the benefit of bias hypothesis. Given that individuals hold deep impression management goals, reputational rationality theory challenges the unqualified classification of response tendencies that deviate from normative standards as irrational. That is, apparent errors and biases can, under certain conditions, be reputationally rational. The reputational rewards associated with cognitive biases may in turn contribute to their persistence. Acknowledging the (sometimes beneficial) reputational consequences of cognitive biases can address long-standing puzzles in judgment and decision making as well as generate fruitful avenues for future research.


Reputational rationality theory inverts this relationship. Reputational rationality theory is primarily concerned with the observer rather than the target.It thus yields novel predictions regarding how observers evaluate targets (rather than how targets shift behavior due to pressures from observers). Reputational rationality theory is inherently a social cognition model, concerned with—for example—how the public evaluates the politician or how the CEO evaluates the employee. The theory suggests that several influential errors and biases—not taking the value-maximizing risk or investing in the worthwhile venture—can serve functional goals once reputational consequences are considered.

As summarized above, prior cognitive and social approaches to judgment and decision making have traditionally omitted empirical investigation of how judgments and decisions are perceived by valued audiences—such as the public or coworkers in the examples above. How concerning is this omission? On the one hand, this omission may be tolerable—if not ignorable—if reputational incentives align with goals that are traditionally considered in this work (e.g., accuracy, optimization, adherence to logic and statistics). Simply put, researchers could safely ignore reputational consequences if such consequences already reinforce conventional wisdom and standard recommendations for what it means to make a “good” decision. If observers penalize targets who recklessly display overconfidence or who flippantly switch their risk preferences based on decision frames, then examining these reputational consequences becomes less necessary, and the omission thus less severe. On the other hand, this omission may be relatively more severe if reputational incentives regularly conflict with traditional measures or undermine standard recommendations.



The challenges currently facing society are daunting. The planet is heating at an alarming pace. A growing number of countries hold nuclear weapons capable of killing millions in mere minutes. Democratic institutions in many countries, including the United States, appear weaker than previously thought. Confronting such challenges requires global leaders and citizens alike to make sound judgments and decisions within complex environments: to effectively navigate risk under conditions of widespread uncertainty; to pivot from failing paths to new opportunities; to properly calibrate their confidence among multiple possible futures. But is human rationality up to the task?

Building on a traditional cognitive and social approaches to human judgment and decision making, reputational rationality theory casts doubt on traditional normative classifications of errors and biases based on individual-level cognition, while simultaneously generating testable predictions for future research taking a broader social/institutional perspective. By examining both the reputational causes and consequences of human judgment and decision making, researchers can gain increased understanding not only into how judgments and decisions are made, but also how behavior can be changed—for good.