Skip to main content
SpringerLink
Log in

Rationality for Economists?

  • Published:
Journal of Risk and Uncertainty Aims and scope Submit manuscript

Abstract

Rationality is a complex behavioral theory that can be parsed into statements about preferences, perceptions, and process. This paper looks at the evidence on rationality that is provided by behavioral experiments, and argues that most cognitive anomalies operate through errors in perception that arise from the way information is stored, retrieved, and processed, or through errors in process that lead to formulation of choice problems as cognitive tasks that are inconsistent at least with rationality narrowly defined. The paper discusses how these cognitive anomalies influence economic behavior and measurement, and their implications for economic analysis.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Similar content being viewed by others

References

  • Ajzen, I. (1987). ''Attitudes, Traits, and Actions: Dispositional Prediction of Behavior in Personality and Social Psychology.'' In L. Berkowitz ed., Advances in Experimental Social Psychology, Vol. 20, pp. 1–63. San Diego: Academic Press.

    Google Scholar 

  • Allais, A. (1953). ''Le Comportement de l'Homme Rationel Devant le Risque, Critique des Postulates et Axioms de l'Ecole americaine,'' Econometrica 21, 503–546.

    Google Scholar 

  • Anslie, G. (1982). ''Beyond Microeconomics: Conflict among Interests in a Multiple Self as a Determinant of Value.'' In J. Elster ed., The Multiple Self. Cambridge, UK: Cambridge University Press.

    Google Scholar 

  • Arrow, K. (1951). ''Alternative Approaches to the Theory of Choice in Risk-Taking Situations,'' Econometrica 19, 404–37.

    Google Scholar 

  • Baron (1994). ''Nonconsequentialist Decisions,'' Behavioral and Brain Sciences 17, 1–42.

    Google Scholar 

  • Baron, J. (1997). ''Biases in the Quantitative Measurement of Values for Public Decisions,'' Psychological Bulletin 122, 72–88.

    Google Scholar 

  • Becker, G. (1993). ''The Economic Way of Looking at Behavior,'' Journal of Political Economy, 101, 385–409.

    Google Scholar 

  • Bernoulli, D. (1738). ''Specimen Theoriae Novae th Mensura Sortis,'' Commentarii Academiae Scientiarum Imperiales Petropolitanae 5, 71–192.

    Google Scholar 

  • Bishop, R. and T. Heberlein. (1979). ''Measuring Values of Extra-Market Goods: Are Indirect Measures Biased?'' American Journal of Agricultural Economics 61, 926–930.

    Google Scholar 

  • Bohm, P. (1972). ''Estimating Willingness to Pay: An Experiment,'' European Economic Review 3, 111–130.

    Google Scholar 

  • Boyle, K. (1989). ''Commodity Specification and the Framing of Contingent-Valuation Questions,'' Land Economics 65, 57–63.

    Google Scholar 

  • Boyle, K., R. Bishop, and M. Welsh. (1985). ''Starting Point Bias in Contingent Valuation Bidding Games,''Land Economics 61, 188–94.

    Google Scholar 

  • Boyle, K., M. Welsh, and R. Bishop. (1993). ''The Role of Question Order and Respondent Experience in Contingent-Valuation Studies,''Journal of Environmental Economics and Management 25, Part 2, S80-S99.

    Google Scholar 

  • Camerer, C. (1987). ''Do Biases in Probability Judgment Matter in Markets? Experimental Evidence,'' American Economic Review 77, 981–997.

    Google Scholar 

  • Camerer, C. (1998). ''Progress in Behavioral Game Theory,'' Journal of Economic Perspectives, forthcoming.

  • Carson, R. et al. (1994). ''Contingent Valuation and Revealed Preference Methodologies: Comparing the Estimates for Quasi-Public Goods,'' University of California, San Diego Department of Economics Working Paper 94–07.

  • Cameron, T. and D. Huppert. (1991). ''Referendum Contingent Valuation Estimates: Sensitivity to the Assignment of Offered Values,'' Journal of the American Statistical Association 86, 910–918.

    Google Scholar 

  • Chipman, J. (1960). ''The Foundations of Utility,'' Econometrica 28, 193–224.

    Google Scholar 

  • Coupey, E. (1994). ''Restructuring: Constructive Processing of Information Displays in Consumer Choice.'' Journal of Consumer Research 21, 83–89.

    Google Scholar 

  • Davidson, D. and P. Suppes. (1957). Decision Making. Stanford, CA: Stanford University Press.

    Google Scholar 

  • Deaton, A. and J. Muellbauer. (1980). Economics and Consumer Behavior. Cambridge, UK: Cambridge University Press.

    Google Scholar 

  • Debreu, G. (1959). Theory of Value. New York: Wiley.

    Google Scholar 

  • Delquie, P. (1993). ''Inconsistent Trade-offs between Attributes: New Evidence in Preference Assessment Biases,'' Management Science 39, 1382–1395.

    Google Scholar 

  • Desvousges, W., R. Johnson, R. Dunford, K. Boyle, S. Hudson, and N. Wilson. (1992). Measuring Nonuse Damages using Contingent Valuation: An Experimental Evaluation of Accuracy. Research Triangle, NC: RTI Monograph 93–1.

  • Diamond, P. and J. Hausman. (1994). ''Contingent Valuation: Is Some Number Better Than No Number?'' Journal of Economic Perspectives 8, 45–64.

    Google Scholar 

  • Festinger, L. (1957). A Theory of Cognitive Dissonance. Stanford, CA: Stanford University Press.

    Google Scholar 

  • Fisher, I. (1930). The Theory of Interest. New York: Macmillan.

    Google Scholar 

  • Fischoff, B., N. Welch, and S. Frederick. (1999). ''Construal Processes in Preference Assessment,'' Journal of Risk and Uncertainty, this issue.

  • Frank, R. (1992). ''The Role of Moral Sentiments in the Theory of Intertemporal Choice.'' In G. Loewenstein and J. Elster eds., Choice over Time. New York: Russell Sage Foundation.

    Google Scholar 

  • Frank, R. (1990). ''Rethinking Rational Choice.'' In R. Friedland and A. Robertson eds., Beyond the Marketplace: Rethinking Economy and Society, pp. 53–87. Sociology and Economics: Controversy and Integration Series. New York: Aldine de Gruyter.

    Google Scholar 

  • Fredrickson, RB. and D. Kahneman. (1993). ''Duration Neglect in Retrospective Evaluations of Affective Episodes,'' Journal of Personality and Social Psychology 65, 45–55.

    Google Scholar 

  • Friedman, M. and L. Savage. (1948). ''The Utility Analysis of Choices Involving Risk,'' Journal of Political Economy 56, 279–304.

    Google Scholar 

  • Garling, T. (1992). ''The Importance of Routines for the Performance of Everyday Activities,'' Scandina-vian Journal of Psychology 33, 170–177.

    Google Scholar 

  • Garling, T. and R. Gillholm. (1998). ''When Do Stated Preferences SP Predict Actual Behavior?'' Working Paper, Goteborg University.

  • Gourville, J. (1996). ''Pennies a Day: Increasing Consumer Compliance Through Temporal Re-Framing,'' Harvard University Working Paper.

  • Green, D., K. Jacowitz, D. Kahneman, and D. McFadden. (1998). ''Referendum Contingent Valuation, Anchoring, and Willingness to Pay for Public Goods.'' Energy and Resources Journal.

  • Grether, D. and C. Plott. (1979). ''Economic Theory of Choice and the Preference Reversal Phenomena,'' American Economic Review 69, 623–638.

    Google Scholar 

  • Harrison, G. (1992). ''Valuing Public Goods with the Contingent Valuation Method: A Critique,'' Journal of Environmental Economics and Management 23, 248–57.

    Google Scholar 

  • Herrnstein, R. and D. Prelec. (1991). ''Melioration: A Theory of Distributed Choice,'' Journal of Economic Perspectives 5, 137–156.

    Google Scholar 

  • Hertzog, R. and R. Wallace. (1996). ''Measures of Cognitive Functioning in the AHEAD Study,'' Journal of Gerontology 52B, 37–48.

    Google Scholar 

  • Hildreth, C. (1974). ''Ventures, Bets, and Initial Prospects.'' In M. Balch et al. eds., Essays on Economic Behavior Under Uncertainty, pp. 99–122. Amsterdam: North Holland.

  • Hoch, S. (1991). ''Time-Consistent Preferences and Consumer Self-Control,'' Journal of Consumer Research 17, 492–507.

    Google Scholar 

  • Holmes, T. and R. Kramer. (1995). ''An Independent Sample Test of Yea-Saying and Starting Point Bias in Dichotomous-Choice Contingent Valuation,'' Journal of Environmental Economics and Management 29, 121–32.

    Google Scholar 

  • Huber, J., J. Payne, and C. Puto. (1982). ''Adding Asymmetricaly Dominated Alternatives: Violations of Regularity and the Similarity Hypothesis,'' Journal of Consumer Research 9, 90–98.

    Google Scholar 

  • Hurd, M. (1999). ''Anchoring and Acquiescence Bias in Measuring Assets in Household Surveys,'' Journal of Risk and Uncertainty, 19, 111–136.

    Google Scholar 

  • Hurd, M., D. McFadden, H. Chand, L. Gan, A. Merrill, and M. Roberts. (1998). ''Consumption and Savings Balances of the Elderly: Experimental Evidence on Survey Response Bias,'' in D. Wise ed. Frontiers in the Economics of Aging 353–387, University of Chicago Press: Chicago.

    Google Scholar 

  • Hutchinson, G., S. Chilton, and J. Davis. (1995). ''Measuring Non-Use Value of Environmental Goods Using the Contingent Valuation Method: Problems of Information and Cognition and the Application of Cognitive Questionnaire Design Methods,'' Journal of Agricultural Economics 46, 97–112.

    Google Scholar 

  • Kahneman, D., D. Fredrickson, C. Schreiber, and D. Redelmeier. (1993). ''When More Pain Is Preferred to Less,'' Psychological Science 4, 401–405.

    Google Scholar 

  • Kahneman, D. and J. Knetsch. (1992). ''Valuing Public Goods: The Purchase of Moral Satisfaction,'' Journal of Environmental Economics and Management 22, 57–70.

    Google Scholar 

  • Kahneman, D., J. Knetsch, and R. Thaler. (1990). ''Experimental Tests of the Endowment Effect and the Coase Theorem,'' Journal of Political Economy 98, 1325–1348.

    Google Scholar 

  • Kahneman, D., J. Knetsch, and R. Thaler. (1991). ''The Endowment Effect, Loss Aversion, and Status Quo Bias,'' Journal of Economic Perspectives 5, 193–206.

    Google Scholar 

  • Kahneman, D., I. Ritov, and D. Schkade. (1998). ''Economists Have Preferences, Psychologists Have Attitudes: An Analysis of Dollar Responses to Public Issues,'' Princeton University Working Paper.

  • Kahneman, D., P. Slovic, and A. Tversky eds.(1982). Judgment Under Uncertainty: Heuristics and Biases. Cambridge, UK: Cambridge University Press.

    Google Scholar 

  • Kahneman, D. and A. Tversky. (1972). ''Subjective Probability: A Judgment of Representativeness,'' Cognitive Psychology 3, 430–451.

    Google Scholar 

  • Kahneman, D. and A. Tversky. (1973). ''On the Psychology of Prediction,'' Psychological Review 80, 237–251.

    Google Scholar 

  • Kahneman, D. and A. Tversky. (1979). ''Intuitive Prediction: Biases and Corrective Procedures,'' Studies in Management Science 12, 313–327.

    Google Scholar 

  • Kahneman, D. and A. Tversky. (1979a). ''Prospect Theory: An Analysis of Decisions Under Risk,'' Econometrica 47, 263–291.

    Google Scholar 

  • Kahneman, D. and A. Tversky. (1982). ''On the Study of Statistical Institutions,'' Cognition 11, 123–141.

    Google Scholar 

  • Kahneman, D. and A. Tversky. (1984). ''Choices, Values, and Frames,'' American Psychologist 39, 341–350.

    Google Scholar 

  • Keynes, J. (1921). A Treatise on Probability. New York: Macmillan.

    Google Scholar 

  • Knight, F. (1921). Risk, Uncertainty, and Profit. New York: Houghton-Mifflin.

    Google Scholar 

  • Larrick (1993). Organizational Behavior and Human Decision Processes.

  • Lowenstein, G. (1988). ''Frames of Mind in Intertemporal Choice,'' Management Science 34, 200–214.

    Google Scholar 

  • Lowenstein, G. (1996). ''Out of Control: Visceral Influences on Behavior,'' Organizational Behavior and Decision Processes 65, 272–92.

    Google Scholar 

  • Lowenstein, G. and D. Schkade. (1998). ''Wouldn't It Be Nice? Predicting Future Feelings.'' In E. Diener, N. Schwartz, and D. Kahneman eds., Hedonic Psychology: Scientific Approaches to Enjoyment, Suffering, and Well-Being. New York: Russell Sage Press.

    Google Scholar 

  • Lucas, R. (1987). ''Adaptive Behavior and Economic Theory.'' In R. Hogarth and M. Reder eds., Rational Choice: The Contrast between Economics and Psychology. Chicago: University of Chicago Press.

    Google Scholar 

  • Machina, M. (1989). ''Dynamic Consistency and Non-Expected Utility Models of Choice Under Uncertainty,''Journal of Economic Literature 32, 1622–1668.

    Google Scholar 

  • Marschak, M. (1950). ''Rational Behavior, Uncertain Prospects, and Measurable Utility,'' Econometrica 18, 111–141.

    Google Scholar 

  • McFadden, D. (1974). ''On Some Facets of Betting.'' In M. Balch et al. eds., Essays on Economic Behavior Under Uncertainty, pp. 126–31. Amsterdam, North Holland.

  • McFadden, D. (1981). ''Econometric Models of Probabilistic Choice.'' In C. Manski and D. McFadden eds., Structural Analysis of Discrete Data with Econometric Applications. Cambridge, MA: MIT Press.

    Google Scholar 

  • McFadden, D. (1994). ''Contingent Valuation and Social Choice,'' American Journal of Agricultural Economics 76, 689–708.

    Google Scholar 

  • McFadden, D. (1997). ''Computing Willingness-to-Pay in Random Utility Models.'' In R. Hartman and J. Moore eds., Essays in Honor of John Chipman, forthcoming.

  • Menger, K. (1934). ''—Das Unsicherheitsmoment in der Wertlehre betrachtungen im Anschluss an das sogenannte Petersburger Spiel,'' Zeitschrift fuir Nationalokonomis, Band V, Heft 4, pp. 459–485.

  • Papandreou, A. (1960). ''Economics and the Social Sciences,'' Economic Journal 60, 715–723.

    Google Scholar 

  • Payne, J., J. Bettman, and E. Johnson. (1992). ''Behavioral Decision Research: A Constructive Process Perspective,'' Annual Review of Psychology 43, 87–131.

    Google Scholar 

  • Payne, J., J. Bettman, and D. Schkade. (1999). ''Measuring Constructed Preferences: Towards a Building Code,'' Journal of Risk and Uncertainty, 19, 243–270.

    Google Scholar 

  • Poulton, E. (1989). Bias in Quantifying Judgment. Hillsdale, NJ: Lawrence Erlbaum.

    Google Scholar 

  • Poulton, E. (1994). Behavioral Decision Theory: A New Approach. New York: Cambridge University Press.

    Google Scholar 

  • Prelec, D. (1991). ''Values and Principles: Some Limitations On Traditional Economic Analysis.'' In A. Etzioni and P. Lawrence eds., Perspectives on Socioeconomics. London: M. E. Sharpe.

    Google Scholar 

  • Prelec, D. and G. Lowenstein. (1997). ''The Red and the Black: Mental Accounting of Savings and Debt,'' MIT Working Paper.

  • Quattrone, G. and A. Tversky. (1986). ''Self-Deception and the Voter's Illusion.'' In J. Elster ed., The Multiple Self. Cambridge University Press.

  • Rabin, M. (1996). ''Psychology and Economics,'' Journal of Economic Literature, forthcoming.

  • Ramsey, F. (1931). ''Truth and Probability,'' In The Foundations of Mathematics and Other Logical Essays, Paul, Trench, Trubner.

  • Russell, T. and R. Thaler. (1988). ''The Relevance of Quasi-Rationality in Competitive Markets.'' In D. Bell, H. Raiffa, and A. Tversky eds., Decision Making: Descriptive, Normative, and Prescriptive Interactions. Cambridge University Press.

  • Samuelson, W. and R. Zeckhauser. (1988). ''Status Quo Bias in Decision Making,'' Journal of Risk and Uncertainty, 1, 7–59.

    Google Scholar 

  • Schkade, D. and J. Payne. (1994). ''How People Respond to Contingent Valuation Questions: A Verbal Protocol Analysis of Willingness to Pay for an Environmental Regulation,'' Journal of Environmental Economics and Management, 26, 88–109.

    Google Scholar 

  • Seip, K. and J. Strand. (1992). ''Willingness to Pay for Environmental Goods in Norway: A Contingent Valuation Study with Real Payment,''Environmental and Resource Economics 2, 91–106.

    Google Scholar 

  • Shafir, E. and A. Tversky. (1992). ''Thinking Through Uncertainty: Nonconsequential Reasoning and Choice,'' Cognitive Psychology 24, 449–474.

    Google Scholar 

  • Silberman, J. and M. Klock. (1989). ''The Behavior of Respondents in Contingent Valuation: Evidence on Starting Bids,'' Journal of Behavioral Economics, 18, 51–60.

    Google Scholar 

  • Simon, H. (1959). ''Theories of Decision-Making in Economics and Behavioral Science,'' American Economic Review 49, 253–283.

    Google Scholar 

  • Simonson, I. and A. Tversky (1992). ''Choice in Context: Tradeoff Contrast and Extremeness Aversion,'' Journal of Marketing Research 29, 281–295.

    Google Scholar 

  • Smith, V. (1979). ''An Experimental Comparison of Three Public Good Decision Mechanisms,'' Scandinavian Journal of Economics, 81, 198–215.

    Google Scholar 

  • Sonnemans, J., A. Schram, and T. Offerman. (1994). ''Public Good Provision and Public Bad Prevention: The Effect of Framing,'' University of Amsterdam Working Paper.

  • Sterman, J. (1994). ''Learning In and About Complex Systems,'' System Dynamics Review 10, 291–330.

    Google Scholar 

  • Svenson, O. (1979). ''Process Descriptions of Decision Making,'' Organizational Behavior and Human Performance 23, 86–112.

    Google Scholar 

  • Svenson, O. (1996). ''On the Modeling of Human Choices in Descriptive Behavioral Decision Theory,'' Stockholm University Working Paper.

  • Taussig, F. (1912). Principles of Economics. Macmillan.

  • Thaler, R. (1985). ''Mental Accounting and Consumer Choice,'' Marketing Science 4, 199–214.

    Google Scholar 

  • Thaler, R. (1990). ''Savings, Fungability, and Mental Accounts,'' Journal of Economic Perspectives 4, 193–205.

    Google Scholar 

  • Thaler, R. (1991). Quasi-Rational Economics. Russell Sage Foundation.

  • Thaler, R.; Johnson, E. (1990). ''Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice,'' Management Science, 36, 643–660.

    Google Scholar 

  • Tune, G. (1996). ''Neglect of Stimulus Information in a Two-choice Task,'' Journal of General Psychology 74, 231–236.

    Google Scholar 

  • Tversky, A. (1977). ''On the Elicitation of Preferences: Descriptive and Prescriptive Considerations.'' In D. Bell, R. Kenney, and H. Raiffa eds., Conflicting Objectives in Decisions. New York: Wiley.

    Google Scholar 

  • Tversky, A. and C. Fox. (1995). ''Weighing Risk and Uncertainty,''Psychological Review 102, 269–283.

    Google Scholar 

  • Tversky, A. and D. Kahneman. (1971). ''Belief in the Law of Small Numbers,''Psychological Bulletin 76, 105–110.

    Google Scholar 

  • Tversky, A. and D. Kahneman. (1974). ''Judgment under Uncertainty: Heuristics and Biases,'' Science, 185, 1124–1131.

    Google Scholar 

  • Tversky, A. and D. Kahneman. (1981). ''The Framing of Decisions and the Psychology of Choice,'' Science 211, 453–458.

    Google Scholar 

  • Tversky, A. and D. Kahneman. (1991). ''Loss Aversion in Riskless Choice: A Reference-Dependent Model,'' Quarterly Journal of Economics 107, 1039–1061.

    Google Scholar 

  • Tversky, A. and D. Kahneman. (1992). ''Advances in Prospect Theory: Cumulative Representations of Uncertainty,'' Journal of Risk and Uncertainty 5, 297–323.

    Google Scholar 

  • Tversky, A., P. Slovic, and D. Kahneman. (1990). ''The Causes of Preference Reversal,'' American Economic Review 80, 204–217.

    Google Scholar 

  • Tversky, A. and E. Shafir. (1992). ''The Disjunction Effect in Choice Under Uncertainty,'' Psychological Science 3, 305–309.

    Google Scholar 

  • Tversky, A., S. Sattath, and P. Slovic. (1988). ''Contingent Weighting in Judgment and Choice,'' Psychological Review 95, 371–384.

    Google Scholar 

  • von Neumann, J., O. Morgenstern. (1947). Theory of Games and Economic Behavior. Princeton, NJ: Princeton University Press.

    Google Scholar 

  • Whittington, D., et al. (1992). ''Giving Respondents Time to Think in Contingent Valuation Studies: A Developing Country Application,'' Journal of Environmental Economics and Management 22(3), 205–225.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Economics, University of California, Berkeley, 94720-3880

    Daniel McFadden

Authors
  1. Daniel McFadden
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

About this article

Cite this article

McFadden, D. Rationality for Economists?. Journal of Risk and Uncertainty 19, 73–105 (1999). https://doi.org/10.1023/A:1007863007855

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1023/A:1007863007855

Search

Navigation