One thing I as an economics student get asked most is: why do economists think people are rational? Surely people don’t do calculations or complicated logical reasoning before they act?
On the second question, I completely agree because I don’t have a lovely formula in my head that tells me what to eat for lunch, what shampoo I buy or any other hundreds of minute or significant decisions I make everyday. But what I do have is an idea of what I like: I’m vegetarian so meat is off the table for lunch, I hate the smell of mint so I’ll never go for a shampoo has herb in it, and so on. This is what we students of economics know as preference. Rationality in the economic sense, really is just about preferences.
Continuing with my lunch and shampoo, if I did eat say beef for lunch or I actually bought a shampoo with basil fragrance, then without any new information, I’m the classic definition of irrationality according to economics. So what exactly is rationality then? In simple words, rationality means the following:
- The ability to make a decision
- The ability to identify one’s preference that makes sense
- The ability to make a decision based on the preference identified.
So you see, really there’s no calculations of any sort, and by making sense in 2), I meant if you prefer apples to oranges to bananas under all circumstances, then when present with an apple and a banana, you will always get an apple.
Then you say, what about these utils or whatever your professor calls it? Isn’t that what we get from plugging numbers into these “utility functions”? In a way, yes and in many other ways, no. I think it is obvious that we can’t measure satisfaction with numbers and dollars. Who is to say one’s pleasure from eating an apple is $5 more than the pleasure from eating a banana? Utility functions are a way to represent preferences. Thanks to mathematics, if you can give me your preference over fruits, I can write “taunting” maths expressions to represent what you like.
Looking back at apples and bananas, if you are a huge fan of apples (as in fruits) and can never get enough of it, then I could write something like u(x)=2x where x is the number of apples you have. And this is saying nothing more than: the more apple you have, the better you feel. In this case, u(x)=2x is saying EXACTLY the same thing as u(x)=100x unless you want to offer me some more information.
On a last note about this rationality business, these functions don’t exist in my or your or anyone’s mind. It’s is a way economists use maths and numbers to build a model and hope to understand decisions and behaviours. Think about those horrifying “utility functions” you maximised or saw your friends maximised, the intuition behind can be really simple. So don’t be afraid the next time you say someone is rational or say yourself is rational. You are not a walking calculating machine or a sophisticated logician (neither is a bad thing in anyway), you are just a normal person as anyone else who knows what she wants and acts like it.
*Also posted at my personal blog.*