Why might the assumption of rationality be critiqued in economics?

The assumption of rationality in economics can be critiqued for oversimplifying human behaviour and ignoring emotional and social factors.

The rationality assumption is a fundamental concept in traditional economic theory. It suggests that individuals always make prudent and logical decisions that provide them with the highest amount of personal utility. These decisions are also presumed to be made with complete information and a clear understanding of the consequences. However, this assumption has been subject to criticism for several reasons.

Firstly, the assumption of rationality oversimplifies human behaviour. People do not always act in their best self-interest and their decisions are often influenced by a variety of factors such as emotions, biases, and social norms. For instance, someone might choose to donate to charity, even if it does not provide them with any direct personal benefit. This behaviour contradicts the rationality assumption, which suggests that individuals always act to maximise their own utility.

Secondly, the assumption of rationality ignores the fact that individuals often make decisions based on incomplete or inaccurate information. In reality, it is impossible for individuals to have access to all the information they need to make the best decision. Moreover, even when information is available, people may not have the time or the cognitive ability to process it all. This is known as bounded rationality, a concept introduced by Herbert Simon, which suggests that people make decisions that are rational within their available information and cognitive limits.

Thirdly, the assumption of rationality does not take into account the influence of social factors on decision-making. People are social creatures and their decisions are often influenced by the behaviour and opinions of others. For example, consumer behaviour is often influenced by trends and fashions, which are determined by the collective behaviour of society rather than individual rationality.

Lastly, behavioural economics, a field that combines insights from psychology, judgement, and decision making, challenges the assumption of rationality. It suggests that cognitive biases often lead people to make irrational decisions. For example, people tend to overvalue immediate rewards compared to future ones, a bias known as present bias.

In conclusion, while the assumption of rationality provides a useful starting point for economic analysis, it is a simplification of the complex reality of human decision-making. It is therefore important to consider other factors such as emotions, social influences, and cognitive biases when analysing economic behaviour.