Monash University Economics Assignment: Rationality in Decision Making

This essay delves into the concept of rationality in decision-making, particularly within the framework of economics. It begins by exploring the assumptions that economists make to simplify complex economic processes, emphasizing the role of opportunity cost in choices. The essay then critiques the model of the rational individual, contrasting it with real-world behaviors and highlighting the limitations of applying theoretical models to practical situations. Drawing on the rational choice theory, it analyzes how individuals weigh options, probabilities, and costs to make decisions. The essay concludes by reiterating the importance of understanding assumptions and recognizing the gap between theoretical predictions and real-life outcomes, emphasizing the need for economists to consider opportunity costs in their analyses.

Running Head: RATIONALITY
RATIONALITY IN DECISION MAKING
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: RATIONALITY 2
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 to explain 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.’

: RATIONALITY 3
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

: RATIONALITY 4
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.

: RATIONALITY 5
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.