On Heuristics and Lazy Micro-Economics: Rational Actors, or else?

The Human perception of its entourage as an entirety of matters, possessions (or goods) and circa inhabitance is, in effect, subjected to rules of thumb. In more explicit terms, heuristics, which can be defined as the unconscious preference to a mental shortcut in a quest to quick and efficient decision-making, are omnipresent as echoes of information roam. Daily on-goings are a whirlwind of unduly decision-making. Utterly, this last statement might also be resulting from Heuristics. But assuming that the average person makes enough decisions per day to an extent where he cannot emphasize rationalistic judgment at every single one of them, we would like to spot under light some anomalies of community.

Whether we are bearing for analysis Availability, Representativeness or Base-rate genre of heuristics, the deviations persist. Let us exemplify; given a resonant piece of information that circulates amongst households of a certain network. There will probably be a divergence in their incomes and thereby, in their consumption–savings structure. If a certain household decides to follow up to the wealthy family’s statement of an electric oven with additional options being fundamental to the house, their budget constraint ∑xipi ≤ R would definitely change.

The new inequation representing the constraint is depending on whether the price of the oven will make the sum of monthly acquired goods higher than the revenues. In either way, the structure followed on a monthly/yearly basis by the household 1 will change ensuing from a quick, probably un-thought of decision. Thus, to what extent can we confirm or deny the rational agent assumption?

We are aware in effect that utility maximization starts from a process of analyzing and categorizing information input onto knowledge, which, per se, will lead to a better knowledge process the following time and a higher utility. However, in our case, household 1 has not followed the steps and decided to form its decision (and utility function) on the basis of received information. We are not, however, anywhere near certainty that the new oven would maximize their utility, and frankly, doubts arise around whether the family is able to balance its budget constraint afterwards. It is not plausible to confirm that such decision is rational.

All in all, the deviations from an analysis-based decision-making process annuls – or at least, challenges – the rationality assumption like we have emphasized previously. However, such a claim leaves the rest of us with a significant query; If not assumed to be fully rational, to what extent should be expected or relied upon decisions on an individual basis? The question surpasses a simple purchase of an oven, it is far more complicated in the sense that anomalies of behavior might arise in every sector; from a Stock exchange employee to a governmental (public sector) worker over minor businesses and ONG’s. The examples are so divergent, yet the anomaly is one.

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