This article explores the concept of rationality in decision making and the assumptions made by economists. It discusses the opportunity cost, rational choice theory, and the limitations of theoretical models in real-life situations.
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Running Head: RATIONALITY RATIONALITY IN DECISION MAKING Name Professor Institution Course Date
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: RATIONALITY2 When coming up with a model, the consumers are faced with tasks of making different assumptions. These assumptions are useful in the simplification of the economic processes and also make it easier for us to comprehend the assumptions faster. Through making assumptions, the economists are also able to break down complex processes to simpler processes. The assumptions in this article form the basis through which a model is made(Stevens, 2018). They are useful in simplifying and highlighting the topic of study.in this article, the two basic assumptions are one for the efficient allocation of resources by the rational human beings who want to maximize utility and the second assumption is that individuals choose between competing goods and they forgo opportunity cost for consuming a given good instead of another one. Assumptions stand as foci for any economic theory(Jessica, 2009). Assumptions are made explicit and the number of assumptions is sufficient toexplain any phenomenon at hand. It is important to understand the assumptions in the article given since they would help us in testing any theory laid down. Precisely, assumptions are made to provide a way of how things seem to be at glance. The opportunity cost will refer to a benefit, profit or value of something that can be given up by someone so as to acquire a different thing. Resources can be put into alternative uses and therefore every action has an opportunity cost(Jessica, 2009). Chris would quite like another drink since it makes him have a pleasurable experience but opts to go home to plan PlayStation and hence his thought of moving home and quitting drinking comes with an opportunity cost of foregoing the pleasurable experience that he could get if at all he could stay in the bar and wait for the barman to bring ‘just one more beer.’
: RATIONALITY3 Jessica argues that ‘Hangovers are only possible because ordinary humans often do not fit the model of rational individuals prescribed by economists. ’ Economists argue that people make rational decisions by weighing all options against a well-defined preference list and chooses the option that favors them most or chooses the one which is valuable to them. The preferences are what the given individual can afford and it is defined as what the individual is willing to pay for goods and services(Sen, 2017). Jessica’s argument that human beings do not fit in the economists model is supported by her argument that the points of view of economists are in most cases inefficient and these points of view get increasingly inefficient as one gets older and older. Jessica is not right in her words since she is seen lamenting because she wakes up in self-pity and regret since she did not attend her friends barbecue. If she was rational enough, she could not have woken have feeling so weary and in pity that everything would not go just as she would like them to be. She was highly carried by the emotion and the company she had at the club and she ended up taking much beer and unfortunately took excess beer that brought her to hang over. According to economists, the rational choice theory argues that social behavior is as a result of the individual behavior of the actors in the economy. These actors in the economy each faces preferences among the available alternatives that permit this person to state which option they opt for. The preferences considered are in most cases complete in that this person can say which of these alternatives they consider to be more preferable or even a case whereby neither of the alternatives is preferable to the other. The alternatives can also be transitive in that if a given option is preferred over the other, then the next option will be preferred over the former .i.e. if K is preferred over L, and L is preferred over M, then K is preferred over M(Bleichrodt & Wakker, 2015). A rational economist will be assumed to take account the available information, the
: RATIONALITY4 probabilities of events, the probable costs and also the gains in the fortitude of preferences and acts steadily in selecting self-resolute best option. Choosing an example of Chris as our rational economist, he says he would quite like another drink since it makes him feel good and it is also a pleasurable experience. However, economists are rational enough since he asks himself about the consequences of taking more beer. He is aware he would face a hangover the following day and feel sick. He would also not be able to catalog his stamp collection and on top of that, he would also forego the pleasure of playing the new PlayStation that he has just bought and has been yearning to play it all along in the whole week. This article is just an ‘It might work in theory, but it doesn’t work in practice. This is because things in a real-life situation on most occasions do not happen the way they do in abstract form.in hypothetical form, everything works out well here and there exist minimal unknown or else very limited confounding variables but when the theory is put into real practice and considered in the real life taking human variability into practice, the results are very different from the theoretical predictions(Dawes, 2018). The theory is therefore just like a map and there exist both good and bad maps. Conclusion Decision making involves making assumptions so as to make complex processes easier and simpler. When making choices, one will have to incur an opportunity cost of not consuming a given commodity. Most policies that are put in theoretical form fail to apply in real life situations and therefore remain to be theoretical. It is therefore important for a rational economist to measure the opportunity costs wisely.
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: RATIONALITY5 References Bleichrodt, H., & Wakker, P. P. (2015). Regret theory: A bold alternative to the alternatives.The Economic Journal, 12(2), 112-145. Dawes, R. (2018).Everyday irrationality: How pseudo-scientists, lunatics, and the rest of us systematically fail to think rationally.Routledge: CRS Press. Jessica, I. (2009). Economists Discover Miracle Hangover Cure: Drink Less.Morning Herald;, 1(1), 1-2. Sen, A. (2017). Rational behaviour.The Journal of new Palgrave dictionary of economics, 1(1), 1-14. Stevens, J. B. (2018).The economics of collective choice.Routledge: CRS Press.