The Human Brain: The Ultimate Scarce, Efficient, and Rational Resource

Abstract

There is a growing divide between neoclassical and behavioral economics. This divide can be partially reconciled by recognizing that the critically scarce resources in all economic inquiries are inside the human brain, mainly neurons and energy that need to be rationally allocated by the brain itself in order to maximize achievement of competing internal demands. The brain must resolve its internal optimization problems before it can optimize the allocation of external resources with alternative uses. Accordingly, the brain will never seek perfect rationality in decision-making, mainly because it could not have evolved to be perfectly rational, in neoclassical terms. Rather, it will refine (and only perfect) its decisions so long as the added value of doing so is worth the added cost. It will also devise decision rules (heuristics) that work as well as is economical, but which will lead to decision errors. Decision errors can be a source of decision efficiency and welfare enhancement above what would be achieved under perfect rationality (if perfect rationality were possible, which it can’t be).