Rational Choice in Standard Economic Theory
The scenarios we have just seen tell us that behavioral economics is all about real rather than ideal behavior. In an ideal world, there is no uncertainty. In an ideal world, our preferences are stable, and our choices are unaffected by changes in context. In an ideal world, reflective thought always triumphs over feelings or intuition; we would always make optimal decisions.
Economic rationality is a core idea in neoclassical economics. Roy Weintraub suggests that neoclassical economics makes three assumptions:
- People rationally choose between outcomes that can be identified and associated with values.
- Individuals weigh costs and benefits of choices to maximize their satisfaction with those choices.
- People act independently on the basis of full and relevant information.
In this tradition, economic agents always try to get the best possible outcomes under the constraints they are facing. In other words, they ‘optimize’.
In the 1976 book The Economic Approach to Human Behavior, the economist Gary S. Becker famously outlined a number of ideas known as the pillars of so-called ‘rational choice’ theory, which has been associated with neoclassical economics. Becker applied the theory to domains ranging from crime to marriage and believed that academic disciplines such as sociology could learn from the ‘rational man’ assumption advocated by neoclassical economists since the late nineteenth century. The decade of the 1970s, however, also witnessed the beginnings of the opposite flow of thinking. This relatively new discipline, behavioral economics, has shown the limits of economic rationality. Our course explores these limits in depth.
Upcoming Lessons
The remainder of this course is divided into a further 10 lessons. Each lesson includes an engaging introduction, video, supplemental text, bullet-point summary, and a short quiz. You can access the course forum at the end of this lesson anytime.
In the next lesson (Lesson 2), we will introduce behavioral economics as a discipline that challenges the assumptions of perfect rationality in order to provide a more realistic account of human behavior. To illustrate this, we discuss two early theories from behavioral economics: prospect theory and mental accounting. We also introduce the concept of reference dependence, a key idea in behavioral economics that shows the relativity of the choices we make. Subsequent lessons then introduce the idea of boundedness in the way people think and behave, namely bounded rationality, bounded self-control (or willpower), and bounded self-interest.
In Lessons 3 and 4, we show the idea of bounded rationality through the lens of information. For example, what is the effect of too little or too much information on people’s decisions? Lesson 5 introduces dual-system theory, which has been used as a framework to explain people’s decision-making as the result of fast and intuitive (System 1) or slow and reflective (System 2) thinking processes.
Lesson 6 is about bounded self-control and people’s shortcomings when it comes to understanding themselves in relation to the future. This is followed by Lessons 7 and 8, which discuss bounded self-interest and social dimensions, ranging from the concept of fairness to the power of social image.
In the final lessons, you will learn more about applications of behavioral economics in practice (Lessons 9 and 10). This will include a discussion of nudging, which is a practice based on insights from behavioral economics, social psychology, and cognitive science. If you’d like to “take it up to eleven”, we have a bonus lesson for you at the end of the course (Lesson 11).
Navigating the Course
This course has been designed to be completed sequentially. It will take about a day of your time from start to finish, excluding extra time if you choose to do some of the recommended reading.
When you’re done with a topic, you can mark it as complete at the bottom of the page. You can navigate between lessons and topics by using either the buttons at the bottom of each page or the sidebar on the left. All topics and quizzes need to be completed for you to receive the course certificate. (Note: a page can’t be marked as complete unless the video has been viewed to the end.)
The course text includes embedded hyperlinks to simplify citations. You will be able to download a complete course bibliography that also includes sources that were used for video content.
You don’t need to complete the course in one session. Our system will remember the lessons and topics you’ve marked as complete and allows you to come back at your convenience to resume your lessons.
We hope you’ll find this course both thought-provoking and useful.
If you encounter any problems along the way, please get in touch with academy@behavioraleconomics.com.