Question

Microeconomics has traditionally been built on the foundation of rational choice.   However, since the 70’s insights from blending psychology and economics have been changing the landscape.   Some have argued this new line of thinking, most often associated with behavioral economics, has laid waste to the micro model of choice.  

To what extent does the rational choice model have a future?   Can it absorb the new insights from behavioral? Do you think we will have two competing models of choice going forward?  

Answer 1

SOLUTION:-

• Rational choice is fuundation of micro economics where it is assumed that consumer seeks to maximize his utility or producer tries to maximize his profit.

• But recent development of behavioral economics which as been shaped by the psychology suggests that human no longer behaves rationally. Human as economic agent tends to behave irrationally. Human as economic agent does not always tries to maximize his utility.

• Behavior of consumer is affected by the many factors, hence sometimes he behaves irrationally. Emotions and Cognitive biases make consumers irrational.

• Rational chice theory is no longer fully applicable in business world. Economists are now using irrational theory to increase sales of corporates.

• Future of rational choice is going to lose its relevancy in future. Hence, we would be seeing models of rationality and irrationality in future.

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