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Rational Irrationality: A Framework for the Neoclassical-Behavioral Debate

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  • Bryan Caplan

    (Department of Economics, Center for Study of Public Choice, George Mason University)

Abstract

Critics of behavioral economics often argue that apparent irrationality arises mainly because test subjects lack adequate incentives; the defenders of behavioral economics typically reply that their findings are robust to this criticism. The current paper presents a simple theoretical model of "rational irrationality" to clarify this debate, reducing the neoclassical-behavioral dispute to a controversy over the shape of agents' wealth/irrationality indifference curves. Many experimental anomalies are consistent with small deviations from polar "neoclassical" preferences, but even mildly relaxing standard assumptions about preferences has strong implications. Rational irrationality can explain both standard, costly biases, as well as wealth-enhancing irrationality, but it remains inconsistent with evidence that intensifying financial incentives for rationality makes biases more pronounced.

Suggested Citation

  • Bryan Caplan, 2000. "Rational Irrationality: A Framework for the Neoclassical-Behavioral Debate," Eastern Economic Journal, Eastern Economic Association, vol. 26(2), pages 191-211, Spring.
    • Handle: RePEc:eej:eeconj:v:26:y:2000:i:2:p:191-211
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    Citations

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    Cited by:

    1. Bryan Caplan & Edward Stringham, 2005. "Mises, bastiat, public opinion, and public choice," Review of Political Economy, Taylor & Francis Journals, vol. 17(1), pages 79-105.
    2. Li, Lunzheng & Maniadis, Zacharias & Sedikides, Constantine, 2021. "Anchoring in Economics: A Meta-Analysis of Studies on Willingness-To-Pay and Willingness-To-Accept," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 90(C).
    3. Baratgin, Jean, 2009. "Updating our beliefs about inconsistency: The Monty-Hall case," Mathematical Social Sciences, Elsevier, vol. 57(1), pages 67-95, January.
    4. Andreas P. Kyriacou, 2011. "Rational Irrationality and Group Size: The Effect of Biased Beliefs on Individual Contributions Towards Collective Goods," American Journal of Economics and Sociology, Wiley Blackwell, vol. 70(1), pages 109-130, January.
    5. Mathieu R. Despard & Michal Grinstein-Weiss & Chunhui Ren & Shenyang Guo & Ramesh Raghavan, 2017. "Effects of a Tax-Time Savings Intervention on Use of Alternative Financial Services among Lower-Income Households," Journal of Consumer Affairs, Wiley Blackwell, vol. 51(2), pages 355-379, July.
    6. Tomas Otahal & Radim Valencik, 2012. "The Anatomy of Error in Decision-making of Rationally Behaving Agents from the Perspective of the Theory of Bounded Rationality: Extension for Contextual Games," MENDELU Working Papers in Business and Economics 2012-21, Mendel University in Brno, Faculty of Business and Economics.
    7. Salter, Alexander William & Tarko, Vlad, 2017. "Polycentric banking and macroeconomic stability," Business and Politics, Cambridge University Press, vol. 19(2), pages 365-395, June.
    8. Mayerhoffer, Daniel & Schulz-Gebhard, Jan, 2023. "Social segregation, misperceptions, and emergent cyclical choice patterns," BERG Working Paper Series 186, Bamberg University, Bamberg Economic Research Group.
    9. Ryan H Murphy, 2016. "The willingness-to-pay for Caplanian irrationality," Rationality and Society, , vol. 28(1), pages 52-82, February.
    10. Matthew W. McCarter & Abel M. Winn, 2013. "When the Economics of a Decision Matters More than the Psychology of the Decision: Understanding the Economic Significance of Auction Fever," Working Papers 13-19, Chapman University, Economic Science Institute.
    11. Bryan Caplan, 2006. "Terrorism: The relevance of the rational choice model," Public Choice, Springer, vol. 128(1), pages 91-107, July.
    12. Nikil Mukerji & Adriano Mannino, 2023. "Nudge Me If You Can! Why Order Ethicists Should Embrace the Nudge Approach," Journal of Business Ethics, Springer, vol. 186(2), pages 309-324, August.
    13. Brahmbhatt, Milan & Dutta, Arindam, 2008. "On SARS type economic effects during infectious disease outbreaks," Policy Research Working Paper Series 4466, The World Bank.
    14. Eric Crampton & Andrew Farrant, 2004. "Expressive and Instrumental Voting: The Scylla and Charybdis of Constitutional Political Economy," Constitutional Political Economy, Springer, vol. 15(1), pages 77-88, March.
    15. Will, Matthias Georg & Pies, Ingo, 2019. "Developing advocacy strategies for avoiding dicourse failure through moralizing and emotionalizing campaigns," Discussion Papers 2019-01, Martin Luther University of Halle-Wittenberg, Chair of Economic Ethics.
    16. Dalibor Roháč, 2009. "Je predpoklad voličskej racionality len mýtus? [Is the assumption of voters' rationality just a myth?]," Politická ekonomie, Prague University of Economics and Business, vol. 2009(2), pages 163-176.
    17. Bryan Caplan, 2003. "The Logic of Collective Belief," Rationality and Society, , vol. 15(2), pages 218-242, May.
    18. Williamson, Claudia R., 2012. "Dignity and development," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 41(6), pages 763-771.
    19. Justin Fox, 2007. "Government transparency and policymaking," Public Choice, Springer, vol. 131(1), pages 23-44, April.

    More about this item

    Keywords

    Behavioral;

    JEL classification:

    • D00 - Microeconomics - - General - - - General

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