Thursday, March 30, 2006

Rational choice

The separation of economic efficiency and liberty is both perplexing and multifarious. Can values be accurately measured in economic terms? Are the measurements meaningful to the environment? One theory might have an answer. Rational choice theory is defined as, “a way of looking at deliberations between a number of potential courses of action, in which ‘rationality’ of one form or another is used either to decide which course of action would be the best to take, or to predict which course of action actually will be taken. Such a perspective finds itself in models for both human and behavior of non-human but nonetheless potentially rational entities, such as corporations or nation-states.”

What is considered to be rational?

The technical meaning in economics is about preferences: preferences are defined to be rational if they are complete and transitive. That is, that the decision-maker is able to compare all of the alternatives, and that these comparisons are consistent.

• If uncertainty is involved, then the independence axiom is often assumed in addition to rational preferences.
• If decision-making over time is involved, time consistency is generally assumed as well.
• Rationality can also mean that the decision-maker always chooses the most preferred option, as in the Utility Maximization problem.

Rational choice theory may help economists to better understand how an individual thinks regarding tastes and preferences. However, as we all know, not all are considered to be rational thinkers. Among the many policies, perhaps the amalgamation of liberty and economic efficiency may be the “solution matrimony” to a sustainable environmental policy.

1 comment:

Larry Eubanks said...

My view is that use of the word "rational" is not very helpful in general. As you note, one meaning of "rational" is simply to use the word as shorthand for what we economists take to be well-behaved preferences. I think there really is no problem with using "rational" in this way.

Yet, for many "rational" is a word that is used to express judgments about preferences, judgments which are normative in character. For many "rational preferences" are good, if for no other reason than they are not irrational preferences. But, when economists use rational in this way, there is much to be cautious and skeptical about. After all, economic efficiency analysis takes preferences as given, and specifically chooses not to judge preferences as to whether they are good or bad or better than other preferences. In effect, if by "rational" we mean more than "well-behaved" (as a property of our mathematical versions of positive economics), we would be judging preferences and would be, ourselves, acting inconsistently with the valued judgments of efficiency economics.