Rationality What? Misconceptions of Neoclassical and Behavioral Economics

Abstract

Both behavioral and neoclassical economists maintain a concept of strict rationality that is exceptionally narrow. Neoclassicists use it as a tool both to explain what agents actually do and as a prescriptive framework. Behavioralists do not believe it adequately explains actual behavior but that it is still a good prescriptive framework. My view is that whatever the technical virtues of strict, narrow rationality in providing a foundation for useful economics constructs, it is completely inadequate as a prescriptive standard. The appropriate concept of rationality for evaluation purposes must be “liberal” or broad, reflecting the complexities of human decisionmaking. Behavioral economists are blind to much of this at a normative-prescriptive level. So their critique of market or other outcomes is impoverished.