Rational behavior
In economics, rational behavior in economics means that individuals maximize some objective
function (e.g., their utility function) under the constraints they face.
The concept of rational behavior has – in addition to making the analysis of
individual behavior a good deal more tractable than a less structured assumption
would permit – two interpretations. First, it allows to derive optimal economic
behavior in a normative sense. Second, models of rational behavior can be
used to explain and predict actual (i.e., observed) economic behavior.
Theory of subjective (expected) utility:
The theory of subjective (expected)
utility
(Savage, 1954)
is the central element of the neoclassical theory of rational economic behavior.
As such, it is the most important example of a theory of rational behavior. Its basic
assumptions are that choices are made:
among a given, fixed set of alternatives;
with (subjectively) known probability distributions of outcomes for each alternative; and
in such a way as to maximize the expected value of a given utility function.
While these assumptions are convenient for many purposes, they may not fit empirically
many situations of economic choice. This is the subject of the theory of
bounded rationality and the research interest of
behavioral economics.
See also:
behavioral economics,
bounded rationality,
equilibrium,
models of microeconomic decisions,
utility
Literature:
Savage (1954),
Sen (1987),
Simon (1987b)
Entry by:
Joachim Winter
