Rationality in Economics

Rationality is one of the most over-used words in economics. Behaviour can be rational, or irrational. So can decisions, preferences, beliefs, expectations, decision procedures, and knowledge. There may also be bounded rationality. And recent work in game theory has considered strategies and beliefs or expectations that are “rationalizable”. Here I propose to assess how economists use and mis-use the term “rationality.” Most of the discussion will concern the normative approach to decision theory. First, I shall consider single person decision theory. Then I shall move on to interactive or multi-person decision theory, customarily called game theory. I shall argue that, in normative decision theory, rationality has become little more than a structural consistency criterion. At the least, it needs supplementing with other criteria that reflect reality. Also, though there is no reason to reject rationality hypotheses as normative criteria just because people do not behave rationally, even so rationality as consistency seems so demanding that it may not be very useful for practicable normative models either. Towards the end, I shall offer a possible explanation of how the economics profession has arrived where it is. In particular, I shall offer some possible reasons why the rationality hypothesis persists even in economic models which purport to be descriptive. I shall conclude with tentative suggestions for future research — about where we might do well to go in future.

[1]  J. Neumann.  Zur Theorie der Gesellschaftsspiele , 1928 .

[2]  J. Hicks,et al.  A Reconsideration of the Theory of Value. Part II. A Mathematical Theory of Individual Demand Functions , 1934 .

[3]  Oskar Morgenstern,et al.  Vollkommene Voraussicht und wirtschaftliches Gleichgewicht , 1935 .

[4]  B. D. Finetti.  La prévision : ses lois logiques, ses sources subjectives , 1937 .

[5]  P. Samuelson.  A Note on the Pure Theory of Consumer's Behaviour , 1938 .

[6]  P. Samuelson.  A Note on the Pure Theory of Consumer's Behaviour: An Addendum , 1938 .

[7]  J. Neumann,et al.  Theory of games and economic behavior , 1945, 100 Years of Math Milestones.

[8]  H. Houthakker.  Revealed Preference and the Utility Function , 1950 .

[9]  J. Nash.  Equilibrium Points in N-Person Games. , 1950, Proceedings of the National Academy of Sciences of the United States of America.

[10]  L. A. Goodman,et al.  Social Choice and Individual Values , 1951 .

[11]  J. Nash,et al.  NON-COOPERATIVE GAMES , 1951, Classics in Game Theory.

[12]  K. Arrow,et al.  Social Choice and Individual Values , 1951 .

[13]  M. Allais.  Le comportement de l'homme rationnel devant le risque : critique des postulats et axiomes de l'ecole americaine , 1953 .

[14]  D. Bernoulli.  Exposition of a New Theory on the Measurement of Risk , 1954 .

[15]  J. Harsanyi.  Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparisons of Utility , 1955 .

[16]  Patrick Suppes,et al.  Outlines of a Formal Theory of Value, I , 1955, Philosophy of Science.

[17]  H. Simon,et al.  A Behavioral Model of Rational Choice , 1955 .

[18]  S. Vajda,et al.  GAMES AND DECISIONS; INTRODUCTION AND CRITICAL SURVEY. , 1958 .

[19]  G. E. M. Anscombe,et al.  Modern Moral Philosophy , 1958, Philosophy.

[20]  K. Arrow.  Essays in the theory of risk-bearing , 1958 .

[21]  H. Raiffa,et al.  Games and Decisions: Introduction and Critical Survey. , 1958 .

[22]  K. Arrow.  Rational Choice Functions and Orderings1 , 1959 .

[23]  T. Schelling,et al.  The Strategy of Conflict. , 1961 .

[24]  F. J. Anscombe,et al.  A Definition of Subjective Probability , 1963 .

[25]  Henry E. Kyburg,et al.  Studies in Subjective Probability , 1965 .

[26]  D. Bernoulli.  Specimen theoriae novae de mensura sortis : translated into German and English , 1967 .

[27]  J. Harsanyi.  Games with Incomplete Information Played by “Bayesian” Players Part II. Bayesian Equilibrium Points , 1968 .

[28]  M. P. Dumont.  Comment … , 1970 .

[29]  Duncan K. Foley,et al.  Lindahl's Solution and the Core of an Economy with Public Goods , 1970 .

[30]  E. Malinvaud.  Lectures on Microeconomic Theory , 1972 .

[31]  Jean-Claude Milleron,et al.  Theory of value with public goods: A survey article☆ , 1972 .

[32]  D. McFadden.  Conditional logit analysis of qualitative choice behavior , 1972 .

[33]  C. Plott.  PATH INDEPENDENCE, RATIONALITY, AND SOCIAL CHOICE , 1973 .

[34]  Peter J. Hammond,et al.  Changing Tastes and Coherent Dynamic Choice , 1976 .

[35]  P. Hammond.  Dynamic Restrictions on Metastatic Choice , 1977 .

[36]  R. Selten.  The chain store paradox , 1978 .

[37]  Donald E. Campbell,et al.  Realization of Choice Functions , 1978 .

[38]  M. Allais.  The Foundations of a Positive Theory of Choice Involving Risk and a Criticism of the Postulates and Axioms of the American School (1952) , 1979 .

[39]  T. Eisele,et al.  On solutions of Bayesian games , 1979 .

[40]  J. Elster.  Ulysses And The Sirens , 1979 .

[41]  M. Allais,et al.  The So-Called Allais Paradox and Rational Decisions under Uncertainty , 1979 .

[42]  Flint Schier.  Ulysses and the Sirens , 1980 .

[43]  R. Rosenthal.  Games of perfect information, predatory pricing and the chain-store paradox , 1981 .

[44]  T. Amemiya.  QUALITATIVE RESPONSE MODELS: A SURVEY , 1981 .

[45]  David M. Kreps,et al.  Rational cooperation in the finitely repeated prisoners' dilemma , 1982 .

[46]  E. Damme.  Refinements of the Nash Equilibrium Concept , 1983 .

[47]  K. Arrow.  Individual Choice Under Certainty And Uncertainty , 1984 .

[48]  B. Bernheim.  Rationalizable Strategic Behavior , 1984 .

[49]  Robert D. Behn,et al.  Quick Analysis for Busy Decision Makers , 1984 .

[50]  David Pearce.  Rationalizable Strategic Behavior and the Problem of Perfection , 1984 .

[51]  Janet L. Yellen,et al.  A Near-Rational Model of the Business Cycle , 1985 .

[52]  J. Mertens,et al.  ON THE STRATEGIC STABILITY OF EQUILIBRIA , 1986 .

[53]  P. Kline.  Models of man , 1986, Nature.

[54]  B. Douglas Bernheim,et al.  Axiomatic Characterizations of Rational Choice in Strategic Environme nts , 1986 .

[55]  R. Aumann.  Correlated Equilibrium as an Expression of Bayesian Rationality Author ( s ) , 1987 .

[56]  John V. Howard,et al.  Cooperation in the Prisoner's Dilemma , 1988 .

[57]  Taradas Bandyopadhyay.  Revealed Preference Theory, Ordering and the Axiom of Sequential Path Independence , 1988 .

[58]  P. Hammond.  Orderly Decision Theory , 1988, Economics and Philosophy.

[59]  T. Tan,et al.  The Bayesian foundations of solution concepts of games , 1988 .

[60]  P. Hammond.  Consequentialist foundations for expected utility , 1988 .

[61]  R Pool,et al.  The allais paradox. , 1988, Science.

[62]  Kenneth J. Arrow,et al.  Preference, production, and capital: Preference and rational choice in the theory of consumption , 1989 .

[63]  A. McLennan.  Consistent conditional systems in noncooperative game theory , 1989 .

[64]  E. Damme.  Stable equilibria and forward induction , 1989 .

[65]  M. Machina.  Dynamic Consistency and Non-expected Utility Models of Choice under Uncertainty , 1989 .

[66]  Peter J. Hammond,et al.  Interpersonal Comparisons of Well-being: Interpersonal comparisons of utility: Why and how they are and should be made , 1990 .

[67]  K. McCardle,et al.  Coherent behavior in noncooperative games , 1990 .

[68]  M. Osborne.  Signaling, Forward Induction, and Stability in Finitely Repeated Games* , 1990 .

[69]  John Hillas,et al.  On the Definition of the Strategic Stability of Equilibria , 1990 .

[70]  Eddie Dekel,et al.  Lexicographic Probabilities and Equilibrium Refinements , 1991 .

[71]  P. Hammond.  Consequentialist Decision Theory and Utilitarian Ethics , 1991 .

[72]  Eddie Dekel,et al.  Lexicographic Probabilities and Choice Under Uncertainty , 1991 .

[73]  Peter J. Hammond,et al.  Aspects of Rationalizable Behaviour , 1992 .

[74]  M. Mariotti.  On the Decision Theoretic Foundations of Game Theory , 1992 .

[75]  S. Sunder.  Experimental Asset Markets: A Survey , 1992 .

[76]  Tilman Börgers,et al.  Pure Strategy Dominance , 1993 .

[77]  P. Mongin.  L'optimisation est-elle un critère de rationalité individuelle? , 1994, Dialogue.

[78]  P. Hammond.  Elementary Non-Archimedean Representations of Probability for Decision Theory and Games , 1994 .

[79]  Peter J. Hammond,et al.  Consequentialism, Non-Archimedean Probabilities, and Lexicographic Expected Utility , 1994 .

[80]  Ariel Rubinstein,et al.  A Course in Game Theory , 1995 .

[81]  Faruk Gul,et al.  Rationality and Coherent Theories of Strategic Behavior , 1996 .

[82]  Rationality and Dynamic Choice: Foundational Explorations. , 1996 .

[83]  G. Asheim,et al.  Admissibility and Common Knowledge , 1996 .

[84]  Admission and Common Knowledge , 1996 .

[85]  Ariel Rubinstein,et al.  On the Interpretation of Decision Problems with Imperfect Recall , 1996, TARK.

[86]  Mark Perlman,et al.  The Rational Foundations of Economic Behaviour , 1996 .