Stephen Monrad

Microeconomics has a deceptively simple definition of rationality. Our decisions are rational if we can do the following:

1. For any two options  A and B,  we can decide whether A is at least as good as B or B is at least as good as A. Note that if they are equally good, both will be true.
2. Our preferences are transitive. That is if A is at least as good as B and B is at least as good as C, then A is at least as good as C.

The first condition states that we are able to make up our minds on any sort of decision. While this seems like an innocuous condition, most people have a difficult time making up their minds. Even the little decisions are hard. I dither over what to order at restaurants. I can’t make up my mind on what flavor of ice cream cone to buy. If I can’t make these straight forward decisions with confidence, what chance do I have on tough problems? How on earth do I pick my job? How do I choose my friends? My guess is that I don’t make informed decisions. I  just guess.

The transitivity condition seems straight forward. All it seems to be asking for is a little consistency in our decisions. If A is better than B and B is better than C then it should follow that A is better than C. If we are guessing and changing our decision criteria, though, it is easy for this to fail. I could like apples more than bananas because I don’t like yellow fruit. I could like  bananas more than carrots because they are sweeter. I could like carrots more than apples because they are cheaper. I have a good reason for each choice but the result doesn’t make a lot of sense.

I am obviously skeptical of our ability to make rational decisions in the economic sense of the term. If we don’t make economically rational decisions, then much of microeconomic theory doesn’t apply. In fact, if we don’t make economically rational decisions, it is going to be pretty hard to make any sense at all of our choices.

I believe that while many of our decisions are rational in the economic sense, we are also irrational from time to time. I believe that our irrational behavior undermines the functioning of the economy in important ways.