Some Thoughts on Economic Rationality
Or, we behave not according to the reason of our powers beyond
A common criticism of mainstream economics is that the assumption economists make that human actors are rational is inaccurate to a significant degree. While I have no doubt that, to a degree, irrationality and behavioural factors play a large part in the decision-making process for actors, I believe that this criticism is not one based on the observation that human action often significantly deviates from rationality, but rather that what economists deign as “rational” has a definition quite unintuitive to the layman.
I am writing this post to hopefully make clear what economic rationality really means, and why human rationality and economic rationality are not the same.
My Definition of Economic Rationality
My definition of economic rationality differs slightly from the typical definition. I would say that an economically-rational actor is one who persistently optimizes to fulfill their aggregable, adaptive preferences. In effect, an economically-rational actor seeks out the necessary information to make good decisions to fulfill preferences that can be considered simple or fungible.
What makes my definition different from standard definitions is simple: I acknowledge the degree to which learning and adaption can shift the way a person behaves, even if a person always behaves mechanically. This point is relatively implicit in standard economics for things like information-gathering, but as to preference setting, it is weaker. Revealed preferences themselves exist as a kind of “F-twist,” albeit one that covers almost all behaviour that can be analyzed with low-dimension data.
Ideal vs. Real Preferences
Most economic models show optimized utility as being relatively uniform in the sense that a fully rational individual should optimize based on factors that can be substituted, to a degree. In effect, one’s fungible preferences are what maximizes one’s utility.
I believe individuals can optimize off said factors, or optimize off of an entirely shifted worldview. The standard, revealed-preferences worldview is what most people follow, and can be analyzed to a great degree. However, one should possess ‘ideal’ preferences that are formed by a long, psychological, educational process. Shifting to this ‘ideal’ worldview represents a bridge away from standard modelled behaviour.
To do so, one must be not only instrumentally rational but epistemically rational. It is in this that psychology, philosophy, and literature has the greatest pertinence to economic questions, in my opinion. Our revealed preferences might emerge socially or psychologically, but our ideal preferences are aspects of our philosophical, divine self.
Basically, one can live their life to the fullest, but not the fullest that they should live to. Understanding what kind of person you should be, what actions bring you the most virtue, instead of base utility, those might not be economic questions, but they are still pertinent for understanding what the limits and strengths of assumed rationality is in economic analysis.
Consider this: one can live their life as a homo economicus, or a sage. Which is best to be? Can we even know?