Question Details

GB 540 Unit 1 Discussion 3

The concept of rational action is a frontier of economic theory. Accordingly, traditional economics holds that humans, as rational beings, make rational economic choices to maximize their economic welfare as pursuit of self-interests. Thus Economics assumes that human economic behavior reflects rational self-interest.
But some economists argue that rationality has its bounds since many human behaviors do not appear to be rational, as traditional economics assume most human behavior is rational. Economist Herbert Simon developed the concept of “bounded rationality,” which means that people are as rational as possible (seek to act in their own best interests) given their limitations. Bounded rationality is based on the premise that an individual- rationality is limited by both his cognitive ability and the economic environment. Thus an economic agent behaves in a manner that is nearly optimal with respect to its goals as its resources will allow.
Therefore, some economists claim that bounded rationality better describes economic agent- behaviors than optimal rationality approach. This is due to the fact that bounded rationality recognizes that it is impossible to comprehend and analyze all of the potentially relevant information in making economic choices. The only possible way of coping with the complexity of the world is to develop techniques, habits and standard operating procedures to facilitate the decision making process. The debate still goes on the issue. Do people make rational decisions in economics? What are the factors that lead to bounded rationality? What leads to irrational economic decisions?
With this in mind, pick a behavior that appears irrational to other people but has rational components for the person doing it. Then provide a thorough explanation for your classmates.

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