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(Ir)rationality Taking Over

Microeconomics is the field of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources, typically in a market setting. One of its assumptions is the rationality of individual economic agents. That is to say, individuals when making economic decisions are fully aware of the pros and cons of their choices, utility-wise, so behave in a rational way as to maximize their own utility, subject to their budget constraint, or as Edgeworth stated in his Mathematical Psychics, published in 1881, “the first principle of economics is that every agent is actuated only by self-interest.”(pp. 16,17) This post is solely intended to make the reader rethink this assumption, with which an economics student undertaking a mainstream orthodox economics program is faced, day in and day out.

An argument for the possible irrationality of consumers has already been posted here (1). The idea was that the subjective nature of a certain good, in that case Art, may not allow for the use of the Microeconomics foundations of rational behavior. And the existence of such goods could be used as an “argument for the thesis that Rationality as assumption on consumption decision is unrealistic and naïve.” I would like to present the hypothesis that, no matter the nature of the good, the way each consumer perceives and evaluates goods is always relative and subjective, dependent on its cultural and sociological environment, among other things. Simply put, choice making is much more complex than just maximization of personal utility.

If we find ourselves in an economic setting, and are ready to make economic choices, as to what goods to purchase, we may not always present rationality in our behavior. Mark Lepper and Sheena Iyengar’s research paper entitled When choice is demotivating, 2000, showed us that when customers in a supermarket are presented with 6 jam varieties are more likely to buy one than customers offered a choice of 24 (difference of 30% to 3% of customers). Marketers are aware of our irrationality as consumers, hence the display of goods in the supermarket. It is not by chance that near the supermarket tills, where we may end up spending some time queuing on top of the one we already spent running up and down the supermarket’s aisles, is where we find newspapers, chocolates and all type of candies, just for us to deal with our impatience/impulse.
On top of that, human beings are social animals. We interact with each other in our daily basis, establishing social norms and certain personal relationships with each other. At the basis of this behavior is our ability to feel, to connect with people, ideas, and the energy around us. As such, emotions come into play, which can very well make us take decisions that we would not consider rational, in retrospect. I believe no example is needed to support this argument, as we have all made decisions solely based in our emotions. Humans are rational, to the extent that they can articulate thoughts, express themselves and make decisions, but I do not believe that those decisions are taken solely based on maximizing individual “utility functions”.
A lot of work as already been done discussing the assumptions under which Microeconomics is founded, especially in the field of behavioral economics, by the works of Dan Ariely (Predictably Irrational), Amartya Sen (Rational Fools), D. Kahneman and Tversky (Choices, values and frames), among others. Economic anthropologists such as Marshall Sahlins (Stone Age Economics), Karl Polanyi (The Great Transformation), among others, have also demonstrated that in traditional societies, choices people make follow patterns of reciprocity, which differ acutely from the assumption of self-interest.
Even though some of the assumptions underlying Microeconomics models may be questionable, the usefulness of its models should be regarded. We should, however, be aware of the potentially dangerous normative power of such assumptions. The idea that we must become this rational consumer, this Homo economicus, when dealing with or making economic choices, can be very dangerous to individuals in a society, in such a critical time of economic, social and environmental upheaval, in the sense that we might become detached from others, the Earth, and even from ourselves, in our blind pursuit of personal maximization of utility.

José Ricardo Sequeira – 729


Author: studentnovasbe

Master student in Nova Sbe

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