Rationality in Psychology and Economics

The task I shall undertake here is to compare and contrast the concepts of rationality that are prevalent in psychology and economics, respectively. Economics has almost uniformly treated human behavior as rational. Psychology, on the other hand, has always been concerned with both the irrational and the rational aspects of behavior. In this paper, irrationality will be mentioned only obliquely; my concern is with rationality. Economics sometimes uses the term "irrationality" rather broadly (e.g., Becker 1962) and the term "rationality" correspondingly narrowly, so as to exclude from the domain of the rational many phenomena that psychology would include in it. For my purposes of comparison, I will have to use the broader conception of psychology. One point should be set immediately outside dispute. Everyone agrees that people have reasons for what they do. They have motivations, and they use reason (well or badly) to respond to these motivations and reach their goals. Even much, or most, of the behavior that is called abnormal involves the exercise of thought and reason. Freud was most insistent that there is method in madness, that neuroses and psychoses were patients' solutions-not very satisfactory solutions in the long run-for the problems that troubled them. The assumption that actors maximize subjective expected utility (economic rationality) supplies only a small part of the premises in economic reasoning, and that often not the essential part. The remainder of the premises are auxiliary empirical assumptions about actors' utilities, beliefs, expectations, and the like. Making these assumptions correctly requires an empirically founded theory of choice that specifies what information decision makers use and how they actually process it. This behavioral empirical base is largely lacking in contemporary economic analysis, and supplying it is essential for enhancing the explanatory and predictive power of economics.