The choice of an alternative that is not the best is irrational. The standard axioms of consumer theory for choice under certainty are: 1. If a consumer's preferences satisfy these axioms he can be described as rational. From: consumer rationality in A Dictionary of Economics ». Subjects: Social sciences — Economics. View all related items in Oxford Reference ». Search for: 'consumer rationality' in Oxford Reference ».
All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single entry from a reference work in OR for personal use for details see Privacy Policy and Legal Notice. Oxford Reference. In a fascinating example, McFadden presents a study that shows Korean peasant women within the same village tend to use the same contraception -- even though there is "substantial, persistent diversity across villages.
Word-of-mouth explained practically all the difference. In another corner of the ivory tower or, more likely, across campus in a glassy lab , neurologists are finding that many of the biases behavioral economists perceive in decision-making start in our brains.
In other words, perhaps our preference for the status quo isn't just figuratively our heads, but also literally sculpted by the hand of evolution inside of our brains. A final example to show how other fields of science are ganging up on classical economics: The popular psychological theory of "hyperbolic discounting" says people don't properly evaluate rewards over time.
The theory seeks to explain why many groups -- nappers, procrastinators, Congress -- take rewards now and pain later, over and over again. But neurology suggests that it hardly makes sense to speak of "the brain," in the singular, because it's two very different parts of the brain that process choices for now and later.
The choice to delay gratification is mostly processed in the frontal system. But studies show that the choice to do something immediately gratifying is processed in a different system, the limbic system, which is more viscerally connected to our behavior, our "reward pathways," and our feelings of pain and pleasure. And there's much more. To explain it, here's Daniel McFadden himself. The following transcript of our email conversation has been very lightly edited for clarity.
Let me try to sum up your paper for readers, because it covers a lot of ground. Classical economists used to posit that, since consumers are rational, we make decisions to maximize our pleasure, end of story.
But your paper reviews all the ways we know that consumers aren't in fact rational but prone to all sorts of biases and habits that pull us from any strictly rational view of the consumer.
Is that alright? This is a good summary, but I think the final message is that neither the physiology of pleasure nor the methods we use to make choices are as simple or as single-minded as the classical economists thought. A lot of behavior is consistent with pursuit of self-interest, but in novel or ambiguous decision-making environments there is a good chance that our habits will fail us and inconsistencies in the way we process information will undo us. Choices are good.
Trade is good. That's the view of neoclassical consumer theory. But it turns out that people don't really like making decisions. We have habits, we like thinking automatically. So sometimes we avoid making choices altogether because it stresses us out. Why is that?
And how might, say, a company use that superior understanding of consumer theory to make consumers behave a certain way? Trade is a contest, with a chance of coming out on the short end. Animals in "fight or flee" situations often find it safer to flee. Similarly, people in situations where trade is possible, or even promising, may find it safer to turn away.
Rationality places strong restrictions on individual consumer behavior. This paper is concerned with assessing the validity of the integrability constraints imposed by standard utility maximization, arising in classical consumer demand analysis. More specifically, we characterize the testable implications of negative semidefiniteness and symmetry of the Slutsky matrix across a heterogeneous population without assuming anything on the functional form of individual preferences.
In the same spirit, homogeneity of degree zero is being considered.
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