Rational behaviour and economic theory

Abstract

The difficulties in atheoretical study of aggregate data have led economists to propose a bottom-up approach to the study of macroeconomic phenomena. The approach involves establishing a theory of individual behaviour and transforming it into a theory of the economy using aggregation methods. As a result, even though macroeconomics is primarily concerned with aggregate phenomena such as the unemployment level or general price movements, issues of individual behaviour have come to occupy a central place in theoretical economic analysis. The chief conjecture about ‘homo economicus’ is that he behaves rationally. This conjecture is thought to be an ‘engine of truth’ that helps to discover the laws of economic behaviour. Market forces are said to eliminate irrational behaviour, and this justifies focusing on the study of rational behaviour. This chapter studies the contribution of various rationality hypotheses to theoretical economics.