In this sense, an economist’s definition of rationality is different to how you may have heard it used before. You might think of someone as having a ‘rational response’ to a particular situation, for example. However, that is not what we mean here. In economics, acting rationally means acting in your own self-interest and making choices in line with your own preferences.
A rational decision-maker is the essential core of homo-economicus, or “economic man”, the hypothetical character constructed by economists to represent the most rationale of individuals. Homo-economicus pursues only their own interests, performing only those actions for which the benefits accrued are, at the very least, equal to the costs of performing that action. Indeed, the assumptions that underly homo-economicus are fundamental to many standard economic theories and frameworks, a point that will be expanded upon in Resource 1b.
The development of the field of behavioural economics has put economists’ assumptions of human rationality to the test. If you are familiar with any of the recent findings in the field, you will know that there is a growing body of evidence which suggests that human beings are simply not rational actors! Behavioural economists cite numerous examples of individuals making decisions which are not utility maximising, but instead result in a loss of welfare. An easy example to think about is addictive behaviour. Alternatively, research from one of the leading behavioural economists, Richard Thaler, found evidence that suggested working adults were fully aware that they were not saving enough for retirement yet continued to avoid making changes to their pension contributions!
Nevertheless, the assumption of rationality is vitally important in economics, as without this assumption of self-interested human decision-making, it simply would not be possible to model a vast number of economic scenarios across the fields of both micro- and macro-economics. This resource will look to convince you of the importance of assumed rational decision-makers and introduce you to the application of rationality in two non-traditional economic settings: the rationality of criminality, and the rationality of climate change.
By the end of this resource, you will be able to:
• Explain the importance of rationality as an economic concept
• Understand how the assumption of rationality allows economists to simplify incredibly complex economic problems
• Think about how we can apply rationality to a number of economic questions and, in particular, areas that go beyond the standard setting of economic markets