Invited Presentation Rational Roots of “Irrational” Behavior: Discussion

The field of cognitive psychology studies how people make decisions and how these decisions are reflected in behavior. In contrast, neo-classical economics has pursued the economic conditions which are sufficient for decentralized resource allocation to achieve a Pareto optimal outcome. In pursuit of these conditions, neoclassical economists have identified those characteristics of economic behavior by consumers and by producers which along with other conditions are sufficient to power the economy to the bliss point of a social welfare optimum. The conditions are quite simple—1) consumers must maximize what has earned the label of a neoclassical utility function subject to income constraints and conditionally upon costless price information and perfectly elastic supplies of commodities, and 2) producers must maximize profits subject to what has earned the label of a neoclassical production function and similar of conditions as assumed for consumers. Neoclassical economics maintains these behavioral hypotheses not as reflections of empirical observation, but as elements of the sufficient conditions for Pareto optimal performance of decentralized economic activity. To label these behavioral hypotheses as “rational” and all others as “irrational” is not only empirically indefensible to even the dullest observer, but most importantly, overlooks the origin of their role in a neoclassical economist’s vernacular, Instead, the neoclassical behavioral hypotheses fall within the set of all rational systems of behavior which all dictionaries consulted by this author limit only to “having reason or understanding. ” In contrast, irrational behavior lacks reason or equivalently is not the result of a decision. The conclusion must be drawn that no great gulf lies between the neoclassical behavioral hypotheses and empirical findings of alternative