3 - Rational choice, irrational choice, and bad decisions

Abstract

This chapter considers rational choice and bad decisions. Traditional economics has relied on the assumption of “rational homo economics.” This chapter investigates the rationality of decision-making and focuses on the concept of the best and the worst choices. The concept of rational choice is based on the premise that at least the best and the worst options can be chosen and the options can be ordered in descending order of preference. Furthermore, we present the idea of revealed preference, which can deduce preference relations that produce rational choices from actual behavior. This chapter discusses on the concept of rationality and irrationality from the set-theoretic perspective. There are two types of rationality that are commonly used in the social choice literature. The first type is so-called the greatest element rationalizability that requires the best option among alternatives. This type of rationality was considered in the previous chapter introduced by the best option. Another type of rationality is maximal-element rationalizability that requires no option in this set which is strictly preferred to any one of the chosen options. This type of rationality is related to Pareto optimality.