Individual and Social Preferences

Abstract

Standard economic theory usually analyzes the decisions made by individuals as a rational process in which each individual has sound and consistent preferences and makes decisions according to the principle of subjective expected utility maximization. Starting from the pioneering work of Herbert Simon and the research of cognitive psychologists Kahneman and Tversky, the contributions provided by cognitive-behavioral theory have repeatedly shown that real agents make choices in a way that differs systematically from standard theory, hence highlighting its limits. Rather than considering standard normative theory as false or unable to explain the data obtained by behavioral economists, several economists decided to develop new formal models that could include the results of different experiments and empirical observations that captured all dimensions of the choice made by an individual. In this sense, they proposed new models that were not intended to challenge standard theory but rather designed to provide a kind of psychological expansion to it. This article has the aim of describing and analyzing the advantages and limitations of these new models, which unfortunately are not always suited to describe the individual behavior, the individuals’ actions, or the equilibria due to the combination of the actions of several players. To overcome the limits of these models, we decided to take into consideration the unfortunately unfinished work of Michael Bacharach, who strived to understand the individual and collective forms of rationality without applying only analytical devices or a theoretical vision of the world but bringing rationality back to the perception level of the agents.