The Irrationality Illusion: A New Paradigm for Economics and Behavioral Economics

Abstract

A new conceptual and formal framework for analyzing economic decisions, the homo communitatis paradigm, is introduced. The framework is in the form of seven principles, which collectively articulate the entire range of factors that affect choice, including all aspects of individual behavior and of the social context—the communities—the actor is a member of. Traditional economic analysis is shown to be a special case of homo communitatis analysis in which key variables are omitted. Using the principles, we show that experimental results such as loss aversion, framing effects, mental accounting, and judgment biases are not irrational and that the apparent irrationality is in every case an illusion arising from incomplete specification and control of independent variables elucidated in the principles. Several implications for future work are discussed, including high-fidelity models of socioeconomic systems, significantly more powerful and detailed economics simulations, and adoption of significantly different approach to design of economic experiments, one that takes into account all the variables involved in human choice.