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Rational Irrationality: A Framework for the Neoclassical-Behavioral Debate

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  • Bryan Caplan

    () (Department of Economics, Center for Study of Public Choice, George Mason University)

Abstract

Critics of behavioral economics often argue that apparent irrationality arises mainly because test subjects lack adequate incentives; the defenders of behavioral economics typically reply that their findings are robust to this criticism. The current paper presents a simple theoretical model of "rational irrationality" to clarify this debate, reducing the neoclassical-behavioral dispute to a controversy over the shape of agents' wealth/irrationality indifference curves. Many experimental anomalies are consistent with small deviations from polar "neoclassical" preferences, but even mildly relaxing standard assumptions about preferences has strong implications. Rational irrationality can explain both standard, costly biases, as well as wealth-enhancing irrationality, but it remains inconsistent with evidence that intensifying financial incentives for rationality makes biases more pronounced.

Suggested Citation

  • Bryan Caplan, 2000. "Rational Irrationality: A Framework for the Neoclassical-Behavioral Debate," Eastern Economic Journal, Eastern Economic Association, vol. 26(2), pages 191-211, Spring.
  • Handle: RePEc:eej:eeconj:v:26:y:2000:i:2:p:191-211
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    References listed on IDEAS

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    1. John Y. Campbell, 1995. "Some Lessons from the Yield Curve," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 129-152, Summer.
    2. Mishkin, Frederic S., 1990. "What does the term structure tell us about future inflation?," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 77-95, January.
    3. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-576, June.
    4. Harvey, Campbell R., 1988. "The real term structure and consumption growth," Journal of Financial Economics, Elsevier, vol. 22(2), pages 305-333, December.
    5. Sharon Kozicki, 1997. "Predicting real growth and inflation with the yield spread," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 39-57.
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    Citations

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    Cited by:

    1. Bryan Caplan & Edward Stringham, 2005. "Mises, bastiat, public opinion, and public choice," Review of Political Economy, Taylor & Francis Journals, vol. 17(1), pages 79-105.
    2. Baratgin, Jean, 2009. "Updating our beliefs about inconsistency: The Monty-Hall case," Mathematical Social Sciences, Elsevier, vol. 57(1), pages 67-95, January.
    3. repec:bla:jconsa:v:51:y:2017:i:2:p:355-379 is not listed on IDEAS
    4. Tomas Otahal & Radim Valencik, 2012. "The Anatomy of Error in Decision-making of Rationally Behaving Agents from the Perspective of the Theory of Bounded Rationality: Extension for Contextual Games," MENDELU Working Papers in Business and Economics 2012-21, Mendel University in Brno, Faculty of Business and Economics.
    5. Matthew W. McCarter & Abel M. Winn, 2013. "When the Economics of a Decision Matters More than the Psychology of the Decision: Understanding the Economic Significance of Auction Fever," Working Papers 13-19, Chapman University, Economic Science Institute.
    6. Bryan Caplan, 2006. "Terrorism: The relevance of the rational choice model," Public Choice, Springer, vol. 128(1), pages 91-107, July.
    7. Brahmbhatt, Milan & Dutta, Arindam, 2008. "On SARS type economic effects during infectious disease outbreaks," Policy Research Working Paper Series 4466, The World Bank.
    8. Eric Crampton & Andrew Farrant, 2004. "Expressive and Instrumental Voting: The Scylla and Charybdis of Constitutional Political Economy," Constitutional Political Economy, Springer, vol. 15(1), pages 77-88, March.
    9. Williamson, Claudia R., 2012. "Dignity and development," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 41(6), pages 763-771.
    10. Justin Fox, 2007. "Government transparency and policymaking," Public Choice, Springer, vol. 131(1), pages 23-44, April.

    More about this item

    Keywords

    Behavioral;

    JEL classification:

    • D00 - Microeconomics - - General - - - General

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