Rational Behavior according to Microeconomics


One of the keystone assumptions in microeconomic theory is that of rational behavior. Essentially, this among many other assumptions is what allows for economists to predict volatile human behavior when it comes to spending habits or anything to do with economics on a day to day basis. 

Rational behavior is the decision-making process that an individual has when making choices to gain some sort of utility for an individual. The assumption is that people will make choices that will grant them their preferred level of benefit or utility. Another assumption made within this theory is that people will either be better off or worse off after each decision they make. This principle assumes that "rational" individuals will make the best decisions that will give them the most personal utility.

Digging deeper however, this assumption is less one dimensional and is more logical and accurate at looking at human economic behavior. For example, within the assumption of rational behavior, the person making the decision is not expected to strictly get the highest return. Instead, the potential for risk and non-monetary returns also plays a factor. As a result, it would be considered "rational" for someone to do something that will have a lower return at a lower risk. 

However as expected, this way of looking at human behavior is still imperfect. Especially when it comes to economic decisions, psychology and the concept of "behavioral finance" tells us that emotions often enter the equation when it comes to these decisions. These factors can skew the tendency for people to behave rationally, and thus make it more difficult to predict economic habits. 

With all this in mind, do you believe that you behave economically rational?

Works Cited
https://www.investopedia.com/terms/r/rational-behavior.asp
https://www.quora.com/What-are-the-basic-assumptions-of-macroeconomics
https://www.investopedia.com/university/microeconomics/microeconomics2.asp

Comments

  1. AnonymousApril 25, 2019 at 2:13 AM

    Nice post Andrew, it's interesting how our emotions can have such a significant impact on our economic actions. I agree with you in that human emotions can result in imperfect and non-idealistic behavior, and I think that it's one of the major reasons why real-life markets sometimes differ from predicted markets. This is because economics is predicated on the assumption that all humans act completely rationally in the marketplace, but due to external factors such as human emotion, we know that this is oftentimes not the case.

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