The Neuroeconomics of Rational Decision Making

Abstract

Economists appropriately stress the problem of scarcity of resources in the external physical world where people seek to maximize their gain from an array of individually conceived wants that far exceed their capacities to fulfill their wants. A nontrivial portion of life for almost everyone is spent making choices and tradeoffs, some made unconsciously, which is to say, automatically or by instincts, routines and habits (regardless of whether or not the routines and habits are set by rational processes). A major goal of conventional microeconomics is to understand how the particulars of alternative institutional settings will encourage people to use their scarce resources efficiently in the external physical world, given whatever rational capacities people possess. And people’s rational capacities are typically viewed as fixed (more or less), not as a variable, subject to more or less activation. The so-called “economic problem,” which reduces, in conventional neoclassical microeconomics, the inherent difficulty of achieving economic efficiency in the external physical world, has been qualified in key ways throughout the discipline’s intellectual history, most notably by Frank Knight and Friedrich Hayek (see Chap. 5). Knight insisted that economics was concerned with the “rationale of life,” but he also recognized that a central problem for the discipline was how far life was, or even could be, rational, or (as rationality is normally conceived by neoclassical economists) as a matter of people deliberately choosing to allocate known resources among known wants. Knight mused that much time and human energy is soaked up in a life-long exploration into the field of alternatives and their evaluations in order that people can determine what ends can be and should be pursued (Knight 1935, p. 105). Hayek’s major concern was that information on people’s wants and the scarcities of resources is scattered among individuals who are the ultimate (and, according to Hayek, only) wellspring of wants. Moreover, subjectively conceived wants determine what physical things in the external world can, indeed, serve as resources; that is, as material and nonmaterial inputs that can be used to actually satisfy individually determined wants (Hayek 1945 and 1952b). Subjective evaluation, accordingly, is at the foundation of both sides of the scarcity dichotomy, wants and resources, the market values of which are necessarily determined interactively in social settings in the external physical world, which means that as a discipline, economics could not, and should not, imitate the methods of the physical sciences. Since Lionel Robbins defined the economic problem as that of coping with scarcity, Knight’s and Hayek’s (and other subjectivists’) methodological concerns have been largely sidelined, if not dismissed, because, if taken seriously, economists’ pursuit of empirical science would be seriously hobbled.