ii Rational self interest Describe the importance of rationa

(ii) Rational self interest Describe the importance of rationality for economic models? How does a rational self-interest assumption effect the validity of economic models?

Solution

ANSWER:

Rationality in economics is a principle that states that individuals always make logical and prudent decisions, thus make choices that result in the most optimal level of benefit or utility for the individual. These decisions give them the greatest satisfaction or benefit, given the choices available and are also yield highest self-interest. Majority of the conventional economic theories are created and used under this assumption that all individuals participate in an activity/action which is behaved rationally. However, the assumption of rationality does not hold in the real world because:

--As decision makers, none of us has time or infinite resources to devote to gather and analyse the information.

--Human factors are the major limits on rational decision making. The perceptions, personal value systems, social and economic factors, etc., are the major human limits on rationality. Every decision maker is a human being and the decisions are influenced by such attitudes, personal beliefs, and biases

--Individuals all have significant limitations to the amount of complexity they can cope with

--Most of the search for decision is stopped as soon as the minimum acceptable level of rationality is reached by the person

--In a decision making situation that consist multiple goals all of which cannot be maximized simultaneously