The classical economic theory assumes and classifies the behavior of humans into rational agents whose decision making process is always directed towards the achievement of maximization of their benefits. However, it typically represents an inaccurate generic understanding of the actual behavior of individuals. Quite often, people elect a decision that may seem irrational or sub-optimal with regard to economic principles. Hence, why don’t humans act rationally with regard to economics generally?
Cognitive Blindness and Shortcuts of the Mind
The principal reason contributing to this is the fact that these brains simplify their complex decisions through the mental which cognitive processes referred to as heuristics. Although facilitating in making quick judgments, the cognitive shortcuts do happen to result in systematic errors known as cognitive biases.
The present bias is to delay the reward from today and take the greater one tomorrow, which is one reason people find it difficult to save money; such as status quo bias, which makes us want things to stay the same, yet some change could improve our economic well-being.
Influence of Emotions
Economic decisions are made in conditions of emotional chaos-most of which entail fear, elation, greed, and anxiety-influencing how risks and rewards are evaluated.Starting from the November 2023 episode, emotional states act as temporary agents to trigger herd behavior in financial bubble and crash situations when emotions take control over reason. Hence arise, overvaluation or panic selling, which would, under classical economics, not be predicted.
Limited Information and Bounded Rationality
Humans have finite cognitive resources and are rarely in possession of all relevant information. Some of these jokes of human decision-making are properly called bounded rationality, in the sense that by taking one or more factors into consideration, individuals are willing to generate a decision process that may be good enough and probably suitable for their purposes, but that diverges from rational considerations of what is the best policy. In such case, just developing the optimal choice, be it rationally, would be so overwhelming or impossible.
The concept, therefore, entails satisficing; in other words, a choice is made where an alternative sufficiently meets a number of needs without going into exhaustive detail regarding its other consequences.
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Social and Cultural Factors
Ajzen (1991) observes, directly or indirectly, that economic decision-making is subject to the influence of social factors, cultural factors, and peer pressure. A decision may appear to be an irrational economic decision; however, on a social view, it makes a lot of sense to either save money for the sake of being in touch with others within a certain context or to give in to group expectations.
Theoretical Implications and Policy Considerations
The recognition that human beings do not always act in a rational way has been the starting point of a growing field of behavioral economics, which is essentially the study of economics with psychological underpinnings.
Conclusion
Humans are paradoxically complex subjects, influenced, in some measure, by bias, emotion, ignorance of that distinction, and social circumstances. This rational decision-making model is, however, not nearly sufficient to encompass all facets. This awareness of situations whereby potential economic agents seem to go astray in their rational judgment should therefore serve to guide policy developers in designing systems and policies that are more compatible with actual behavior.
Sareena Bilal is a versatile and passionate content writer with a flair for storytelling across diverse domains, including economics, gaming, technology, travel, and dining. With a strong foundation in computer science and a proven record of crafting compelling content for global audiences, she brings both technical insight and cultural sensitivity to every piece she writes. Sareena currently volunteers as a luxury features writer for La Haute D’Arabie, where she produces immersive content on elite travel, wellness, and fine dining.
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