Rational choice and economic behavior

Abstract

This paper discusses several concepts that can be used to provide a foundation for a unified, theory of rational, economic behavior. First, decision-making is defined to be a process that takes place with reference to both ‘subjective’ and ‘objective’ time, that distinguishes between plans and actions, between information and states and that explicitly incorporates the collection and processing of information. This conception of decision making is then related to several important aspects of ‘behavioral economics’, the dependence of values on experience, the use of behavioral rules, the occurrence of multiple goals and environmental feedback.

Our conclusions are (1) the non-transitivity of observed or ‘revealed’ preferences is a characteristic of learning and hence is to be expected of rational decision-makers; (2) the learning of values through experience suggests the sensibleness of short time horizons and the making of choices according to ‘flexible’ utility; (3) certain rules of thumb used to allow for risk are closely related to principles of Safety-First and can also be based directly on the hypothesis that the feeling of risk (the probability of disaster) is identified with extreme departures from recently executed decisions. (4) The maximization of a hierarchy of goals, or of a lexicographical utility function, is closely related to the search for feasibility and the practice of ‘satisficing’. (5) When the dim perception of environmental feedback and the effect of learning on values are acknowledged the intertemporal optimality of planned decision ‘trajectories’ is seen to be a characteristic of ‘subjective’ not ‘objective’ time. This explains why decision making is so often best characterized by rolling plans. In short, we find that economic man - like any other - is an existential being whose plans are based on hopes and fears and whose every act involves a leap of faith.