Suppose someone is rational only half the time.

If you had to understand something intellectually in order to do it, none of us would be able to walk.Įconomics is based on the assumption that people have reasonably simple objectives and choose the correct means to achieve them. …the assumption describes our actions, not our thoughts. The second offers an opportunity to learn something.ĭavid Friedman, in Hidden Order: The Economics of Everyday Life, explains the assumption of rationality this way: Either we can remark––wistfully or cynically, according to our temperament––on the inadequacy of human nature, or we can ask, “How might such behavior be serving someone’s purposes?” The first option offers the satisfaction of exempting oneself from the great mass of human folly. To a large extent, the assumption of rationality is nothing more than a commitment to inquire sympathetically into people’s motives. All scientists make simplifying assumptions about the world, because the world itself is too complicated to study. Physicists, the most successful of scientists, routinely assume that the table is frictionless when called upon to model the motions of billiard balls. But here is how Steven Landsburg explains this assumption in his textbook, Price Theory and Applications:īut the fact of the matter is that all assumptions made in all sciences are clearly false.

Given these realities, it appears as if the assumption of rationality is false, and this doesn’t seem to concern professional economists. Most of economics can be summarized in four words: “People respond to incentives.” The rest is commentary Spock would need Alcoholics or Gambling Anonymous, or the idea of a self-control credit card that in advance voluntarily limits one’s spending in various categories automatically.

Spock of StarTrek fame, it seems in many areas of life we act more like Homer Simpson of TheSimpsons. Rather than man being a completely rational calculator, similar to Mr. The idea that “Economic Man”–– Homoeconomicus––has unbounded rationality, self-interest, free-will, is selfish, self-maximizing, and entirely efficient in his decisions and choices, has sometimes been proven false by a new school of economics: Behavioral Economics. The assumption of rationality has come under attack in recent decades, mostly from within the economics profession itself. Ed and Ron discussed the two sides of human action: rationality and irrationality on the August 22nd show, and why economists (such as Steven Landsburg, David Friedman, Steven Levitt, and many others) cling to this assumption even though it’s been challenged by behavioral economists such as Dan Ariely, Richard Thaler, and others.

Spock says he never understood gambling