Rational After All : Toward an Improved Theory of Rationality in Economics

In this paper we critically review the literature on rational choice theory (RCT) and the critical approaches to it. We will present a concise description of the theory as defended by Gary Becker, Richard Posner and James Coleman (as well as others) at the University of Chicago from the mid-1970s to the early 1990s, we will discuss its epistemological assumptions and predictions and we will also examine the most important arguments against it. We will give our main emphasis on the critique coming from behavioral economics and we will try to see if humans’ supposed cognitive constraints lead to a failure of rationality or if they constitute rational responses to the scarcity of information, time and energy. In our discussion we will use findings from experimental economics and the sciences of the brain, especially evolutionary psychology and neuroeconomics. Our intention is to present an improved theory of rational choice that, informed from the above discussion, will be descriptively more accurate but without losing its predicting power. Moreover, we will conclude by trying to answer the most important related policy question: when rationality seems to fail, does this necessarily imply that agents should be paternalistically protected against themselves? We will briefly defend the thesis that, in the long-run, it is much better for them and the society at large for the individual decision makers to be let alone to develop rational responses to their cognitive constraints