Knowledge, Beliefs and Economics

Knowledge, Beliefs and Economics

Edited by Richard Arena and Agnès Festré

This book surveys how economists engage with knowledge and beliefs in various fields of economic analysis, such as general equilibrium theory, decision theory, game theory, experimental economics, evolutionary theory of the firm, financial markets and the history of economic thought.

Chapter 8: Utility or Rationality? Restricted or General Rationality?

Raymond Boudon

Subjects: economics and finance, economic psychology


Raymond Boudon 8.1 INTRODUCTION Two eminent Nobel Prize-winning economists, Herbert Simon and Gary Becker, have made important contributions that extend the explanatory power of the Expected Utility Model (EUM). Simon suggested decision makers will accept decisions they perceive to be satisfying, relegating the search for optimal decisions only to particular situations. Given that information is generally costly, rather than aiming to gather all the information required to make a fully rational decision, decision makers make use of a bounded rationality approach. This idea has deeply influenced the social sciences. Moreover, Gary Becker showed that actors’ preferences can be treated as endogenously generated by earlier behaviour rather than be taken as given. In his Accounting for Tastes (1996, Chapter 1, paras 1, 3–4), he claimed that the EUM was an alternative to the causal approach used in the social sciences, and one in which behaviour was explained by psychological, cultural or biological forces. He also contended that this alternative approach had much greater explanatory power than its causal counterpart. While I agree with this latter point, I will try to show that the EUM and the causal approach do not exhaust all the possible ways of explaining individual behaviour. A third approach puts forward the idea of seeing individual behaviour as basically rational, while at the same time broadening the definition of rationality used by the EUM. This approach has a greater explanatory power than the EUM and will be the focus of my discussion in the text...

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