Are People Rational in the Economists Sense

Economics is described by Lionel Robbins as the science, which describes human behaviour as a relationship between (given) ends and scarce means, which have alternative uses. Consequently assumptions have to be made about people, how they behave, and how they make decisions. Moreover, the behavior of an economy reflects the behavior of the individuals that make up that economy (Mankiw and Taylor, 2006), supporting how important these assumptions are. Economists assume people are rational with well-ordered preferences (Wessels 2006).

Moreover, rational choice theory states these preferences are transitive and rational people seek and act to maximize utility, which they derive from those preferences, subject to various constraints (Ullen, 1999). Another assumption within the theory is that preferences are complete; so a rational person can always state what preference is preferred, or be indifferent (Lecture Notes). Moreover, rational choice theory, also known as choice theory or rational action theory, is a framework for understanding and often formally modeling social and economic behavior (Blume and Easley, 008). The definition of "rationality" in the theory simply means that an individual acts as if balancing costs against benefits, to arrive at an action that maximizes personal advantage (Freidman 1953), otherwise known as utility.

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An example is a professional accountant who spends 50 hours a week in his office, earning ? 100 an hour for his labour, he chooses to spend 2 hours gardening on a Saturday, when he could have hired a gardener to do it for him. The opportunity cost of mowing his lawn would be £200 plus the value of leisure he could have enjoyed when not gardening. He could have hired a gardener for £20, compared to the opportunity cost of £200, which seems a bargain. Consequently is the accountant acting irrationally? Under the established discipline that gardening is classified as work, it would seem the accountant is indeed acting irrationally, however, the accountant may have acted to do some gardening for stress relief, which constitutes as leisure, therefore gaining utility of happiness, and showing its not irrational at all.

In addition this can also be linked the blurring of leisure and work classifications in recent years. The rational choice framework is widely used as the dominant theoretical paradigm within microeconomics (Gibbons, 1992). Subsequently, most neoclassical economists assume people are “rational” and are self-interested (Mankiw and Taylor, 2006), but the term is narrowly used in economics, so as to exclude from the domain of the many rational phenomena that psychology would include in its definition of rational (Herbert 1986).

Furthermore, in economics, rationality is viewed in terms of the choices it produces, compared to other social sciences where rationality is viewed in terms of the processes it employs (Herbert 1986). Neoclassical economics rests on three assumptions; two have already been described as utility maximisation and rational preferences among outcomes, which can be associated with values. Another assumption is that people act independently on the basis of full and relevant information (Weintraub, 2007). However, the world is large and complex, and we don’t have the capacity to understand everything. Read also what do think classical economists

Consequently, our decisions are sometimes not thought through, and we can only be rational within limits such as time and cognitive ability (Powazek, 2009). Furthermore, this has led to criticisms about these assumptions and economists developing models, which are more psychologically plausible. Herbert Simon was the first person to introduce bounded rationality, which refers to human cognitive abilities, and how they are limited to a certain extent. Moreover, according to Simon, people are only partly rational, with the remaining parts of their actions being emotional or irrational (Herbert,1955).

Consequently, the assumption that individuals act rationally may be viewed as ignoring important aspects of human behaviour. Modern economics has shown a decrease in the far-sighted rationality assumption and an increase in other approaches to problems such as bounded rationality (Collander, 2000). Moreover, human behavior differs in systematic ways from that predicted by the standard economic model of unbounded rationality, and the departures from the standard unbounded model can be divided into two categories: judgement and decision making (Jolls, Sunstein and Thaler,1998).

Actual judgements made by people compared to unbiased forecasts made by the standard, unbounded model, systematically depart due to the use of the rules of thumb (Jolls, Sunstein and Thaler,1998). The availability heuristic, in which the frequency of some event is estimated by judging how easy it is to recall other instances of this type, lead us to erroneous conclusions. People tend to conclude the probability of an event happening is greater if it has been witnessed before, compared to if it has not.

For example predicting that a car crash is more likely to happen, if you have witnessed one yourself (Tversky and Kahneman,1982). Someone using such a rule of thumb may be behaving rationally in the sense of economizing on thinking time, but such a person will nonetheless make forecasts that are different from those that emerge from the standard rational choice model (Conlisk ,1996). The actual decisions made often violate the axioms of expected utility theory (Jolls, Sunstein and Thaler ,1998).

The axioms characterise rational choice, however, actual choices differ from this model, as seen in the early experiments by Allais and Ellsberg. (Camera, 1995). Related to this is the 1979 experiment by Daniel Kahneman and Amos Tversky, which emphasises the importance of framing, in the presentation of alternatives, and the effect it can have on people being risk-aware or risk-adverse (Business News, 2009). Therefore, showing that people are not always completely rational, as they can become confused by the emotions of the situation and terminology, rather than the basic unbounded model.

Regardless of whether economists use a bounded or unbounded economics model, there will always exist consumers who don’t act rationally, and thus markets need regulation. Moreover, if people were always rational there would be no need for market regulation. For instance smoking cigarettes could be seen as irrational in an economist’s own sense, as to us they aren’t gaining utility. However, to the smoker, they may see the utility gain, when they reach the withdrawal stage.

Moreover, people can act differently if they have different preferences, it doesn’t make them irrational. The government believes that juvenile smokers impose externalities on their future adult selves, to the extent that we as a society do not accept the revealed preferences of children as being indicative of their welfare (utility), and we believe that those under the age of consent should not smoke (Laux, 2000). This is an example of market regulation, by the government imposing laws, which forces people to act rationally, by reducing the demand for cigarettes.

According to the information gathered, we can generally assume that people act rationally in an economic sense. Also, this assumption is useful in determining economic models and making predictions based off those models. Although this may not always be true, irrational behaviour in markets can be regulated, forcing people to act rationally. The economist’s rational person has much in common with the lawyer’s reasonable person. They look to the consequences of their acts, decide by processes or reasoning and act thereupon, rather than act capriciously (Young, 2010).

For well over a century a reasonable person or perhaps, put more accurately, a reasonable man has been a central figure in the landscape of the law (Moran, 2003). The definition of a reasonable man in the context of law, is a legal measuring stick against which to determine whether or not a defendant exercised appropriate caution in an undertaking, or whether he exhibited negligence by not taking the precautions that the hypothetical reasonable person may have taken under the given circumstances, or by doing something that a reasonable person would not have done (YourDictionary, 2000).

In addition, although the efinition was originally defined for a reasonable man, a reasonable person can be seen as an ordinary person of either sex, not exceptionally excitable or pugnacious, but possessed of such powers of self-control as everyone is entitled to expect that his fellow citizens will exercise in society as it is today (Elkins, 2009). The reasonable person represents an objective standard against which any individuals conduct can be measured, also, specific circumstances of each case requires different kinds of conduct and degrees of care, whereas the reasonable person standard does not change (Herring, 2006).

Furthermore it was frequently used in tort and criminal law to denote a hypothetical person in society who exercises average care, skill, and judgment in conduct and who serves as a comparative standard for determining negligence (Zedner 2004). An example of this is in the case of Director of Public Prosecutions v. Camplin (England, 1978). The defendant was 15 years old alone with a middle-aged Pakistani man, who sodomized the defendant and then laughed at him. In reaction to this the defendant killed the man with a chapatti pan.

The judge informed the jury that the reasonable man was an adult, not a person of the defendant’s age, yet the house of lords rejected this, stating that the reasonable man should have the same power of self control as a person of the same age and sex of the defendant. Furthermore he should have the characteristics of the accused that affect the gravity of the provocation. The jury originally convicted the defendant for murder, but he appealed contending the judge was wrong to direct the jury that age was irrelevant, which was allowed.

Lord Simon of Glaisdale in Camplin referred to "a reasonable man" means "a man of ordinary self-control". Following this, the reasonable man has the characteristics of the accused that relate to the provocation, even if this gives him inherently unreasonable characteristics. For example in the case of Morhall, R v (1995), the reasonable man test in Section 3 of the Homicide Act 1957, referred to a hypothetical person having the power of self-control to be expected of an ordinary person of the age and sex of the defendant.

In this case, after a lengthy period of glue sniffing, the defendant stabbed his friend seven times in the course of a fight, causing his death. The defendants glue sniffing was therefore taken into account as a characteristic of a reasonable man, and he was found not guilty. So in that situation the defendant was reasonable in a lawyer’s sense, due to the fact that sniffing the glue had lowered his self control considerably. However, although addiction is relevant in the reasonable man test, being intoxicated is not.

The main reason for this is due to, when the defendant was intoxicated at the relevant time, which may not be so taken into account, because that, like displaying an ordinary lack of self control, is excluded as a matter of policy (Sixthformlaw, 2008). An intoxicated driver who accidentally injures a pedestrian may not have intended to cause the pedestrian's injury, however, because a reasonable person would not drive while intoxicated, it creates an unreasonable risk of harm to pedestrians and other drivers.

Consequently, a driver may be found guilty to an injured accuser for negligence (NetIndustries, 2010). In the case of Smith R v Morgan James [2000], the defendant and victim were both alcoholics and friends, and during an argument the defendant picked up a knife and stabbed the victim to death. The defendant argued that he did not intend to kill or cause grievous bodily harm, because he was suffering from diminished responsibility; and was acting under provocation. The jury took into consideration the defendants depression upon his powers of self-control and was found guilty of manslaughter not murder.

Consequently the law was broadened to include certain characteristics of the defendant, beyond simply their age and sex, which could be taken into account when applying the objective test (Sixthformlaw, 2008). Furthermore, this came under severe critique because it negated the objectivity of the test, by attributing all the characteristics of the defendant to the reasonable man. Eventually, this was overruled by the case of Holley, Jersey v [2005], because the defence’s alcoholism shouldn’t have been taken into account.

Consequently showing the law is still undecided on certain issues relating to reasonableness, especially in the area of Battered Woman Syndrome, who have to rely on diminished responsibility (Sixthformlaw, 2008). In most cases, people with higher than average skills, such as doctors, are held to a higher standard of care. A standard of care is a medical treatment guideline that specifies appropriate treatment based on scientific evidence and collaboration between medical professionals involved in the treatment of a given condition (MedicineNet, 2004).

So if a doctor misdiagnoses a patient the jury would look at how similarly qualified practitioners would have managed the patient's care under the same or similar circumstances. The accuser must establish the appropriate standard of care and demonstrate that the standard of care has been breached (MedicineNet, 2004). In the context of law and economics, there is one important aspect in which the rational person falls down compared with a reasonable person. This is in the sense of proportion, in which a reasonable person does not do anything disproportionate.

Moreover, to make our rational person reasonable, restrictions would be needed to impose on the preferences of that person, such as legislation (Young, 2010). For example, one night our rational person finds someone climbing through the window of his or her kitchen. If the person is reasonable, our rational person might push the window shut and lock it, trapping the intruder. Such a response might be considered proportionate. But being merely rational, our person proceeds to strike the intruder on the head with a rolling pin until he is unconscious.

Having the intruder trapped and unconscious might well be preferable in estimation, to having him merely trapped, and potentially incapable of untrapping himself. Now we might say that our rational person is unreasonable in that the use of the rolling pin is disproportionate to the situation. However, rolling pin or no rolling pin, the person is still rational (Young, 2010). The economic analysis of law is an analysis of law, applying methods of economics. Economic concepts are used to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated (Freidman, 1987).

Laws affect resource allocation; for example, a law that finds fuel companies liable for high emissions will create incentives for more renewable energy within those companies, reducing externalities. In addition, if individuals are rational, larger fines for parking illegally will reduce the number of illegal parkers. Conversely, suppose people are irrational, legislation would be passed to reduce parking fines to reduce the number of illegal parkers. Consequently, this shows that in these economics models, people are generally rational.

Assuming people are rational in the economist’s sense and reasonable in the lawyer’s sense helps to develop our understanding of free markets and human behaviour, enabling us to make predictions and regulate market behaviour. It is impossible in the real world for people to be completely rational, due to time restrictions and cognitive ability. However, it doesn’t matter if people are not reasonable or rational all the time, because its just useful for economists to assume this, so that they can develop theories, as well as being a useful tool in law to assume people are reasonable for comparison.

Regulation allows for irrationality to be displaced within economic models and people, who are unreasonable, will get prosecuted accordingly with legislation. Even people who are usually rational and reasonable, under certain circumstances, can be forced to act irrationally and unreasonable. The world would be a beautiful place if everybody was rational and reasonable, however, this isn’t the case. In conclusion, whether people are reasonable or rational, it doesn’t matter, what matters is making these assumptions allows for helpful tools for economists and lawyers within their professions.