Everyday people make decisions that affect themselves and other parties. This essay will discuss if people are rational and if people are reasonable. In particular will be focusing on whether people are rational in the economist’s sense, and, reasonable in the lawyer’s sense and whatever the outcome, does it matter? It is an important matter as peoples actions have effects, externalities on others, on third parties and it is significant to understand why people act the way they do and comprehend how this behavior is useful for lawyers and economists in their professions. In order to begin discussing whether people are rational a clear definition is needed. Being rational is classified as being consistent with or based on or using reason, rational behavior is a process of rational inference and rational thought. (Simon 1986). Rationality is the state of having good sense and sound judgment. It is the quality of being consistent with or based on logic (Gibbons 1992). As a term, it is related to the idea of reason.Economists usually assume that people are rational. Rational people systematically and purposely do the best they can to achieve their objective, given the available opportunities (Sugden 1991). The Rational choice theory, also known as rational action theory, is a framework for understanding and often formally modeling social and economic behavior. Gibbons (1992) describes it as the dominant theoretical paradigm in microeconomics. He continues to explain that it is also “central to modern political science and is used by scholars in other disciplines such as sociology and philosophy.” The 'rationality' described by rational choice theory is different from the everyday and most philosophical uses of rationality. 'Rationality' means in colloquial language 'sane' or 'in a thoughtful clear headed manner'. In Rational Choice Theory, 'rationality' simply means that a person reasons before taking an action. Within economics, a person balances costs against benefits before taking any action, be it purchasing a good, lighting up a cigarette or murdering a person. In rational choice theory all decisions, mad or sane, are arrived at by a 'rational' process of weighing costs against benefits. Assuming humans make decisions in a rational process implies that their behavior can be modeled and thus, predictions can be made about future actions (Cooter 1998).
Economists are interested in the allocation of resources, in the nature and causes of the wealth of nations or perhaps something else (Solow 1956). All of those things depend on the actions and decisions of human beings. Economists therefore have to make some assumptions about human beings, about how human beings act and how human beings decide how to act. Economists assume that human beings are highly rational and self-interested. This assumption is especially characteristic of neoclassical economists. Some non-neoclassical economists do also accept it, but some do not (Mankiw 2008)Mankiw (2008) explains that neoclassical economists usually assume that people are rational, in other words, that human beings make the choices that give them the best possible advantage, given the circumstances they face. Circumstances include the prices of resources, goods and services, limited income, limited technology for transforming resources into goods and services, and taxes, regulations, and similar objective limitations on the choices they may make.Most theories within economics assume people are rational; one example is the most basic theory within economics; the supply and demand theory. The theory behind the supply and demand model is contingent on the idea that in a free market economy, the amount of an item that the producer supplies and the amount that the customer demands both depend on the item’s market price. According to the law of supply, supply and price are proportional, the higher an item’s price, the more will be supplied by the producer. According to the law of...
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