Exploits (a Tiny Blog)

What does it mean to be rational?

There is a lot of misunderstanding about the formal meaning of the word rational in economics— even among economics textbook writers. Rationality has little to do with self-interest, being fully informed, or happiness. Though rationality certainly does not preclude these things.

Rationality is…

Rational consumers have preferences. Preferences allow the consumer to rank alternatives (ties are allowed). They can have any ranking they want.. Rational consumers choose the highest ranked alternative among the set of alternatives they can afford.

Economists represent these rankings with a utility function that gives higher ranked alternatives a higher score. Representing preferences with a utility function allows economists to use the tools of mathematics to study choices.