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Rationality, Irrationality and Economic Cognition

  • John Whalley

This paper contrasts the modern use of the assumption that rationality guides individual economic behaviour, as reflected in simple models of utility and profit maximization, to literature between 1890 and 1930 which sharply challenged the use of such an assumption, as well as to later literature in economic psychology from Herbert Simon onwards which sees economic (and other) cognitive processes in different ways. Some of the earlier literature proposed objective and operational notions of rationality based on the availability of information, ability to reason (cognitive skills), and even morality. Learning played a major role in individuals achieving what was referred to as complete rationality. I draw on these ideas, and suggest that developing models in which economic agents have degrees (or levels) of economic cognition which are endogenously determined could both change the perceptions economists have on policy matters and incorporate findings from recent economic psychology literature. This would remove the issue of whether economic agents are dichotomously rational or irrational, and instead introduce continuous metrics of cognition into economic thinking. Such an approach also poses the two policy issues of whether raising levels of economic cognition should be an objective of policy and whether policy interventions motivated by departures from full economic cognition should be analyzed.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1445.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1445
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  1. B. Douglas Bernheim & Antonio Rangel, 2002. "Addiction and Cue-Conditioned Cognitive Processes," NBER Working Papers 9329, National Bureau of Economic Research, Inc.
  2. Augier, Mie, 2001. "Sublime Simon: The consistent vision of economic psychology's Nobel laureate," Journal of Economic Psychology, Elsevier, vol. 22(3), pages 307-334, June.
  3. Becker, Gary S & Murphy, Kevin M, 1988. "A Theory of Rational Addiction," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 675-700, August.
  4. Veblen, Thorstein, 1909. "The Limitations of Marginal Utility," History of Economic Thought Articles, McMaster University Archive for the History of Economic Thought, vol. 17.
  5. Waldfogel, Joel, 1993. "The Deadweight Loss of Christmas," American Economic Review, American Economic Association, vol. 83(5), pages 1328-36, December.
  6. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  7. Blais, Andre & Young, Robert, 1999. " Why Do People Vote? An Experiment in Rationality," Public Choice, Springer, vol. 99(1-2), pages 39-55, April.
  8. Herbert A. Simon, 1984. "Models of Bounded Rationality, Volume 1: Economic Analysis and Public Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262690861, June.
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