During a chat last week with a Fellow Student of Economics, the discussion quite naturally turned to rational behavior. Disclaimer: it’s been a while since I’ve gone over the technical lingo, so I’m not sure that we were discussing rationality as properly used in economic jargon.
So we were talking about rational behavior, and more specifically whether a particular person, to whom he might or might not be married, was capable of behaving rationally. He found that he could not rationally explain her behavior. He then mentioned that relatively recent research and experiments revealed that many people do not, in fact, act as rationally as older models of economic behavior would suggest! (It was funny; I guess you had to be there. And have an econ degree.)
Anyhow, as I said earlier, I’m only a teensy bit familiar with the literature he was referring to. Nonetheless, I told him the following:
Since I started studying econ, I have assumed that everybody always behaves rationally. Everybody always seeks to maximize their net benefit (profit, if you want to think in dollars). In economics-ese, everybody acts until the marginal benefit of further action equals the marginal cost of further action.
Everybody always behaves rationally. So if people seem irrational, it’s not because they’re actually irrational. It’s because you don’t know what they value.
Now, that’s not to say that they’ve accurately measured their benefits, or costs, or time preferences, or interest rates, or whatever. And that’s not to say that their decisions are what most people would consider wise. But everybody always takes what they think are profit-maximizing (or loss-minimizing) actions.
People make so much more sense when you realize that they are rational, even if they place different values on things– goods, services, feelings, yelling loud, getting the last word in– than you do.
Fellow Student of Economics said that made perfect sense. We both acknowledged that it wouldn’t help him win any arguments anytime soon.