Rational choice: a normative concept

Behaving rationally has a positive connotation, meaning for most people to make purposeful decisions after considering some pros and cons. However, in economics, rationality is a normative concept that prescribes choosing the utility or profit-maximizing one among the myriad of alternatives. Anything else is irrational, a paradox. Neither the motivation nor the restrictive conditions for rational choice are realistic, but it became the yardstick to evaluate actual human behavior. Behavioral Economics and Keynes argue that a meaningful decision theory needs to be descriptive, capturing how humans decide. The choice environment is often complex, information capacity is limited, the experienced utility may differ from expected utility, preferences may change, and even under known probabilities (risk), the experts in decision theory failed to follow the normative concept. The findings in Behavioral Economics clearly show that framing and moods affect decisions and that humans –experts, managers, lay-persons alike–may switch the evaluation criteria. Already Bernoulli introduced psychology (utility) to solve the Petersburg paradox, and prospect theory added the asymmetric effects of gains and losses on utility.