Rationality – An Economist’s Convenience

Within economics, the concept of rationality is an idealistic deviance from real life, and a tool used that grossly oversimplifies the complex irrationality of man. The assumption that consumers are rational allows economists to group together  non-autonomous individuals into one singular organism, whose prime reason for existence is to maximise utility. However, this presumption is more of a convenience than a reflection of real life, as the recent development of “behavioural economics” driven by academics such as Richard Thaler, combine psychology and economics to theorise that humans are not indeed rational in the sense that idealistic economists previously portrayed them to be.

Classically, an economist would portray man to be rational. A rational choice, by definition, is a choice that grants the choice maker the greatest benefit. However, the subjective term “benefit” cannot be easily measured. Hence, economists apply an arbitrary measurement to benefit, so that utility can be valued. This arbitrary measurement of benefit is generally simplified as “highest potential monetary value obtained after transaction”. To an extent, this makes sense ; surely if a consumer had the choice between receiving two monetary values for the same work, the so-called “rational” consumer would choose the greater value, in order to obtain the largest value of money after the transaction.

However, the use of money as an arbitrary measurement of happiness is in itself an oversimplification of the complexities of the human psyche. The assumption that utility=money obtained, is in itself not compatible with human behaviour. For example, in Dan Ariely’s book “Predictable Irrational” he surmised : “People will work more when they have to work for a cause than for cash,” which contradicts the assumption that man’s prime motivation is derived from money obtained, but rather man can be susceptible to be more greatly driven by the immaterial concept of “cause”.

Predictably Irrational

Therefore, if man can be more greatly motivated by “cause than cash”, then we cannot assume that utility is solely derived from money obtained. Hence, the classical application of human rationality (that man will act to purchase the best valued feasible good) cannot be assumed in such a broad-brush fashion.

Ultimately, the notion of rationality in economics is more a tool of convenience, rather than a real life reflection of human behaviour. To assume man’s rationality is to assume that consumers will collectively act as a mechanism driven purely to maximise their own utility/money obtained post transaction. However, rationality in this broad sense breaks down when economists must take into account that consumers have differing motivations, and hence differing interpretations of the subjective term “utility.” Therefore, humans may appear to be self-serving rational creatures, but in reality, man is driven by our own complex idiosyncrasies; which cannot be applied to a model or theory based upon the notion that man will always act rationally.