Economic Rationality In Psychology

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Rationality is a term that most people understand as making sensible decisions and choices based on facts and the amount information someone possess in a particular situation. However, in the world of economics and psychology this term can be assumed in two different contrasts. In economics, rationality can be defined as individuals making decisions based on their self-interest as well as maximising their utility. This is also mentioned by Edgeworth (1881 p.16) where he states ‘the first principle of Economics is that every agent is actuated only by self-interest’. Whereas in psychology, rationality is understood as making quick decisions that will suffice based on conscious thought processes. Both of these areas of social science interpret …show more content…
Economic rationality entails making decision that maximise ones utility. Whereas in psychology, rationality consist of weighing up facts and information to find the best outcome or help solve certain problems. It is believed in psychology, that our brains are split into two different parts when we are put into a situation where we need to make a decision. One part of the brain focuses on emotion and the other focuses on acting rationally. The emotional side makes choices that make us the most content and satisfied. The rational side of the brain makes choices that suit our best interest. For example, an individual deciding whether to buy junk food would have the rational side of his brain choice to avoid it due to it being unhealthy while the emotional side would choice to buy it as it maximises ones …show more content…
As I mentioned earlier psychologist disagree with the notion that individuals are always rational with every choice they make and other aspects such as emotion will have an impact. As mentioned by Simon (1986 p.209) ‘psychology on the other hand as always been concerned with both the irrational and the rational aspects of behaviour’. The one thing that diverges psychologist perceptions of rationality to an economist’s view of rationality is that psychologist understands that individuals cannot always be 100% rational and from time to time will make decisions that can be considered as irrational. Therefore, in this respect the assumptions of a decision making model do in fact matter as the assumptions characterised with the theory or model will impact the result or outcome and lowers the predictive power that the model enables us to

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