To anyone who’s studied economics, the first assumption and perhaps the only assumption that remains constant in all models of economics is— ‘human beings are rational’.
It used to baffle me, as I got a smorgasbord of explanations on what rationality entailed— being sensible, making ‘wise’ decisions that are the best for us, doing a proper cost-benefit analysis, etc.
And then popped a big question: Are we really rational?
Over the top, let’s just say that rational choice theory produces an x-ray image of human life. Like the x-ray, rational choice theory does not show everything. Nor is the picture necessarily very pretty. But it shows you something important, something you could not see before.
Now I am breaking it down. A simple definition of rationality says, that
Rational people respond to incentives:when it becomes more costly to do something, they will tend to do less; when it becomes easier, cheaper, or more beneficial, they will tend to do more;
When evaluating their choices, rational people keep in mind the overall constraints upon them: not just costs and benefits, but their total budget. The total budget here is not just cash in your bank account. It also encompasses your time, energy, talent and attention and it not only determines what make of car you end up with, but what kind of person;
They will consider the future consequences of present choices.
For instance,
If the price of Skoda rises, you buy a Hyundai instead. (People respond to incentives.) when your income rises, you plump for an Audi. (People consider their budget.) You know that the loan to buy the Audi must eventually be repaid. (People are mindful of future consequences.)
What I am trying to convey through this definition should not be confused with Homo economicus, or ‘economic man’. Homo economicus doesn’t understand human emotions like love, friendship or charity or even envy, hate or anger—only selfishness and greed. He knows his own mind, never makes mistakes and has unlimited power. This is the kind of guy who would anything for a dollar, assuming the task didn’t take more than a dollar’s worth of time.
The concept of Homo economicus subtly differs from what I am trying to convey when I say people are rational.
People being rational implies that:
People are not wholly self-interested or obsessed with the idea of money. They are motivated by normal human emotions, such as parental disapproval (which most teenagers are aware of) or racial hatred.
We do make complex calculations of costs and benefits when we act rationally, it’s only that most of the times we can’t explain it. If given a pen and paper, most of us can’t explain how we came to throw the ball in the basket, yet the brain carries out the calculations unconsciously.
We are not blessed with omniscience or perfect self-control. There are limits to our will power, we make resolutions and we break them. Take the dessert for example, bad for you, but sure tastes good. But it’s bad for you becomes less of a worry since we’ve got advanced healthcare, and that’s the reason some studies show that we have rationally recognised that it has become safer to be obese and harder to exercise. Yet in the end, just how rational we are is a question to be settled by research, not armchair theorising.
It is undeniable that humans, unlike our infallible comrade Homo economicus, have irrational quirks and foibles. For example, when a teenager’s relative is suffering from a disease due to unbalanced diet(let’s day diabetes), he will be extra careful about their own diet. But it didn’t really increase one’s chances of catching the disease, the true costs of catching the disease didn’t change, only the perceptions of them. Either he was overreacting to the danger, or underreacting before he was personally touched by experience of the disease. This is hardly a case of perfect rationality.
So you might think all this explanation was a waste of time. You might as well think rational choice theory is something like flat earth theory, which, with hindsight we can say was an incorrect one. But NO. It’s more like a perfectly spherical earth theory. The earth isn’t a perfect sphere, but it’s nearly a sphere, and for many purposes the simplification that the earth is spherical will do nicely.
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