On the Rationality of the Economic Actors
Modern economic theory follows the neoclassical approach and largely relies on the paradigm of rational choice. The paradigm of rational choice interprets human decision making as fully rational and based on Bayesian optimization of subjective utility. This rational way of modelling human decision making stems from the axiomatic characterization of utility and subjective probability rather than from the direct empirical observation of the human economic behaviour. There is plenty of evidence which questions the rational choice approach, both for its interpretation of decision-making and for the assumptions on which it is based. Decisive critiques also come from interdisciplinary studies which integrate economics with findings from psychology, neurology, research on artificial intelligence and cognitive disciplines in general.
From these criticisms alternative characterizations of the rationality of the economic actors have been formulated, so that different “visions of rationality” coexist in economic literature and assume different standards of rationality (see Fig. 4.1).
While models of full or perfect rationality assume that “the human mind has essentially demonic or supernatural reasoning power,” models of bounded rationality underline the boundaries of human reasoning. Perfect rationality of the economic actors is interpreted as their capability of performing unbounded rational reasoning and is modelled by probability theory and concretized in the optimization under constraints.
Models of bounded rationality stem from the empirical observation of economic decision-making and are essentially informed by the systematic violation of the rational choice paradigm. Sub-optimal outcomes are not just odds that get eliminated because of the principle of survival-of-the-fittest. They configure in many cases stable solutions. Admitting the boundaries of the subjective rationality means to interpret the deliberate decision-making process as “the ability to construct new representations of problems” and stresses the “distinction between two types of cognitive processes — the effortful process of deliberate reasoning on the one hand, and the automatic process of unconscious intuition on the other.” As represented in Fig. 4.1, there are essentially “two main forms of bounded rationality: satisficing heuristics for searching through a sequence of available alternatives, and fast and frugal heuristics that use very little information and computation to make a variety of kinds of decisions.”
This chapter offers an overview on the rationality debate in economics. After discussing the unsolved dualism between rationality assumption and psychology of choice, some of the solutions adduced in defence of the neoclassical paradigm will be presented. The bounded rationality approach will then be introduced and it will be focussed in particularly on the pioneering contributions of Simon and of Kahneman and Tversky. The illustration of some principles of human problemsolving, framing-effects and prospect theory will then conclude the chapter.
For convenience, the analysis of heuristics (both as sources of behavioural biases and as ecological aspects of bounded rationality) will be examined in the next chapter. This will serve as an introductory discussion on the debiasing research. The debiasing research will be considered as a possible inspiration for developing a suitable framework for the experimental analysis of the self-referentiality of economic theories and theory absorption.
KeywordsRational Choice Prospect Theory Expected Utility Theory Rational Choice Theory Framing Effect
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