Behavioural Economics - Can Islamic Banking Be Considered Rational?

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Religion and Economics
Can Islamic Banking be considered Rational?

Emma Cornelis Corvinus University Budapest 12 May 2010

- Introduction -

Classical economists ascribe complete rationality to the behavior of human beings. But do the things people do in life really make sense? According to the conventional ways of predicting human behavior and human choices, one would handle out of perfect self-interest and perfect rationality and one would in addition possess perfect information and stable preferences. Looking at people from this so-called perspective of the Homo Economicus, many aspects of personal decision making processes remain unexplained.

Specific sets of actions that are at first sight hardly explainable by rational choice theory, are those related to religion. Yet for ages the whole world has and for many people their daily lives have revolved around religion. In America, 90 percent of the adults claim to have a religion, 60 percent is member of a religious institution (e.g. a church or synagogue) and 40 percent attends religious services on a regular basis (Iannaccone, 1992). Due to the globalization a mixture of different cultures and related religions can be found in most big cities, for instance throughout Europe.

In the streets expressions of many different religions can be observed; Christians might wear a necklace with a cross, Muslim women can be recognized from their kerchiefs, Orthodox Jews wear side curls and yarmulkes. If these actors are rational as proposed by conventional economists, what is exactly the utility they receive from following a religion? In addition, many aspects of religion are a matter of belief rather than that it is proven. A pertinent illustration of a conviction without verified information is the belief in heaven and hell after death. Why would religious, yet rational, people make a choice based on imperfect


Edgeworth (1881) was one of the first mathematicians explaining economic models with the main principle that every agent is driven in his choices by pure self-interest. In every situation of choice, human behavior should be assumed egoistic, and consequently have the ability to choose from the options that cannot be improved more (‘the core’ of the economy). He was already at that time aware of the level of abstraction of his models. In relation to religion, he even states that “it is far from the spirit of the philosophy of pleasure to depreciate the importance of religion”. It can be interpreted that he was meaning to say that his practices are 1

suitable for simplifying decision making, but still the real world is of course far more complex and has preferences on a higher level than pleasure (or utility). Sen (1977) points out that two important concepts should be mentioned in relation to the assumptions of individual egoism of the economic theories of Edgeworth (1881): sympathy and commitment. The behavior following on both phenomena can contradict the theories of rationality. I will in this essay only elaborate on the concept of commitment. Commitment relates choice to an anticipated level of welfare (Sen, 1977). If you feel committed to a religion, you are expecting something in return. One expectation could be a pleasant after-life, which can be categorized as an intangible and an uncertain reward. For a lifetime one should show commitment to the philosophy of the religion in order to maybe receive the utility of it in a later stage. In this context, it may seem irrational to act committed upon a belief like this. This is only one example, as not all religions include the belief in life after death and many more examples of commitment in the context of religious behavior could be given.

According to Sen (1977), it is impossible to find a proper definition of rationality. Explaining rationality by the definition of merely acting out of self-interest is too narrowly seen in...
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