Rationality in Economics

Rationality is one of the most over-used words in economics. Behaviour can be rational, or irrational. So can decisions, preferences, beliefs, expectations, decision procedures, and knowledge. There may also be bounded rationality. And recent work in game theory has considered strategies and beliefs or expectations that are “rationalizable”. Here I propose to assess how economists use and mis-use the term “rationality.” Most of the discussion will concern the normative approach to decision theory. First, I shall consider single person decision theory. Then I shall move on to interactive or multi-person decision theory, customarily called game theory. I shall argue that, in normative decision theory, rationality has become little more than a structural consistency criterion. At the least, it needs supplementing with other criteria that reflect reality. Also, though there is no reason to reject rationality hypotheses as normative criteria just because people do not behave rationally, even so rationality as consistency seems so demanding that it may not be very useful for practicable normative models either. Towards the end, I shall offer a possible explanation of how the economics profession has arrived where it is. In particular, I shall offer some possible reasons why the rationality hypothesis persists even in economic models which purport to be descriptive. I shall conclude with tentative suggestions for future research — about where we might do well to go in future.