The Concept of Rationality

What does the concept of rationality mean in economics?

In economics, rationality refers to decision making processes that is based on making choices that result in the optimal level of benefit or utility for an individual. It simply means that when you make a choice, you will choose the thing you like best. It is important to acknowledge the difference of the usual definition of rationality that is to be sensible and reasonable. The assumption of rational behavior implies that people will rather take actions that benefit them versus actions that are neutral or hurt them.

Economic rationality accepts that people want satisfaction, without saying whether those preferences are good or bad or monetary or emotional. Rationality is vital for economists because it lets them assume that people act in relatively predictable ways. They use this assumption to build economic models and theories. One infamous theory is the law of supply and demand that states if something costs more, rational people are probably going to want to buy less of it and sell more of it. An individual’s willingness to take on risk may be considered rational depending on their goals and circumstances.

For example, it is likely financially beneficial for executives to stay in a company rather than retire early, it is still considered rational behavior for them to seek an early retirement if they feel the benefits of retirement outweigh the utility from the paycheck they receives. The optimal benefit for an individual may involve non-monetary returns, this is usually done by weighing the advantages against the disadvantages of a certain choice. Although it is assumed that subjective utility is equal to self-interest, these are not identical, because the notion of subjective utility allows that one might have preferences that are not purely motivated by self-interest.

Rational choice theory is used to model human decision making, where it aids economists better comprehend the behaviour of society in terms of individual actions as explained through rationality, in which choices are consistent because they are made according to personal preferences. According to rational choice theory, rational individuals have self-control and are unaffected by emotional factors. However, behavioral economics acknowledges that people are emotional and easily distracted, and therefore, their behavior does not always follow the predictions of economic models. Psychological factors and emotions influence the actions of individuals and can lead them to make decisions that may not appear to be entirely rational.

In rational choice theory, agents are described by their unchanging sets of preferences over all outcomes. Agents are rational if their preferences are complete and are logically ordered, which is they do not exhibit any cyclic inconsistencies. In addition, for choices in which the probabilities of outcomes are either risky or uncertain, rational agents exhibit consistencies among their choices much as one would expect from an astute gamble. Rational choice theory is applied to other important areas as well, including evolutionary theory, political science and warfare. Studies in this field allow economists to comprehend, predict and advice optimal outcomes and choices.

Bibliography

Amadae, S.M. “Rational Choice Theory.” Encyclopædia Britannica, Encyclopædia Britannica, Inc., 17 Nov. 2017, www.britannica.com/topic/rational-choice-theory.

Hayes, Adam. “Rational Behavior Definition.” Investopedia, Investopedia, 26 Feb. 2020, www.investopedia.com/terms/r/rational-behavior.asp.

What Is ‘Rationality’? Economy, 22 Feb. 2017, www.ecnmy.org/learn/you/choices-behavior/what-is-rationality/.