The microeconomic approach constitutes an essential pillar of modern economic analysis. It is based on two fundamental concepts: the use of individual decision makers as the basic unit of analysis and the assumption that these decision makers act rationally. In this article, we’ll dive into the concept of rationality, define its characteristics, and examine how it shapes people’s economic decisions.
Table of Contents
Defining rationality
In an economic context, rationality refers to a logical and consistent decision-making process adopted by individuals. A rational decision maker generally follows the following steps:
- Identification of available alternatives: The decision-maker lists all the possible options available to him and discards those that are not feasible in his context.
- Consideration of relevant information: The decision maker takes into consideration all the information available or that he deems relevant to assess the consequences of each alternative.
- Establishing an order of preference: Based on the consequences of each alternative, the decision maker ranks the options according to his preferences. This order must respect the conditions of consistency and completeness.
- Choice of the optimal alternative: Finally, the decision maker chooses the alternative which ranks first in his order of preference. He chooses the option whose consequences he prefers over all the other alternatives available.
Rationality and behavior of individuals
Although the rationality hypothesis is commonly used to describe the behavior of individuals in economics, it is important to note that some people may behave in ways that appear irrational by this definition.
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Indeed, when making a decision, individuals can sometimes ignore known feasible alternatives or be influenced by impossible alternatives. They may also fail to collect certain information on the consequences of the available options or even contradict themselves in their ranking of the alternatives.
However, it is crucial not to immediately conclude to irrationality. For example, some people may deliberately overlook information that, although relevant, would require significant cost to collect.
In this case, this apparent negligence may actually be perfectly rational, because collecting this information would be too costly in time or resources.
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Towards a realistic analytical framework
Since the work of Herbert Simon, Daniel Kahneman and Amos Tversky, economists have developed a more realistic analytical framework, which avoids relying on a strong rationality hypothesis. This framework incorporates cognitive biases and the limits of human rationality into economic models. Thus, it is more reflective of the behavior of real individuals.
However, despite these advances, the rationality assumption remains a convenient simplification widely used in many economic analyses. It facilitates the understanding of economic mechanisms and makes it possible to formulate useful predictions for many cases.
Conclusion
Rationality in the microeconomic approach is a key element for understanding the decisions made by individuals in an economic context. It is based on a logical and coherent decision-making process, where individuals carefully evaluate the alternatives and their consequences before making a choice. However, it is important to recognize that this assumption is not always true in reality, and economists continue to explore more realistic analytical frameworks that incorporate cognitive biases and the limits of human rationality.
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