Is Economic Rationality in the Head?
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Many economic theorists hold that social institutions can lead otherwise irrational agents to approximate the predictions of traditional rational choice theory. But there is little consensus on how institutions do so. I defend an economic internalist account of the institution-actor relationship by explaining economic rationality as a feature of individuals whose decision-making is aided by institutional structures. This approach, known as the subjective transaction costs theory, represents apparently irrational behavior as a rational response to high subjective transaction costs of thinking and deciding. The theory has two attractive features. First, it reconciles rational choice theory with the increasing body of evidence cataloguing putative errors in economic decision-making. Second, it vindicates the explanatory power of individual choice against externalist challenges; the subjective transaction costs theory keeps economic rationality in the head.
KeywordsEconomic rationality Economic agency Market rationality Subjective transaction costs Behavioral economics Heuristics and biases Extended mind
This paper has been long in the making, so I owe many people my thanks, including but not limited to Jerry Gaus, Terry Horgan, Keith Hankins, John Thrasher, Tyler Cowen, Adam Martin, Mike Munger, Alex Von Stein, Don Ross, Mark Alfano, Peter Boettke, Fred D'Agostino, Art Carden, David Schmidtz, Cathleen Johnson, Vernon Smith, Bart Wilson, and several anonymous referees.
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