Abstract
This chapter presents a modelling narrative on rational choice or smart behaviour from a bounded rationality perspective, building in part on the pioneering work of Herbert Simon and Harvey Leibenstein. I argue that smart or rational individuals can behave inefficiently at both the micro or macro (social) level in both the realm of production and consumption. Smart people can be efficient or inefficient. Hence it is possible to have rational inefficiency. It is shown that such inefficiency can persist over time irrespective of the competitive environment. Also, one cannot necessary derive choices and related outcomes that will be efficient from the smartness or rationality assumption. Additionally, what is rational from the individual’s perspective might very well be irrational from the social perspective. Private rationality is not the same thing as social rationality. It is also important to differentiate rational individual choice behaviour from behaviour that is error-free or decisions that aren’t subject to regret. Making mistakes can be consistent with rational or smart behaviour. Much depends on the decision-making capabilities of the individuals and the relevant decision-making environment. It is these capabilities and environments that critically determine the extent which outcomes are either privately or socially efficient.
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