Rational Agent Assumption

Book: The Essential Tversky



The philosopher in me appreciates Amos Tversky’s work in the sense that it persistently questioned the strongly held and heavily relied upon the rational agent assumption (RAA) of economists (and psychologists?) and economic models. The mainstream field of economics as we are taught in university is entirely underpinned by the premise that humans, businesses, States, etc., act ‘rationally’ when making economic decisions. From this assumption, the ‘laws’ of economics can be derived (think supply and demand). The obvious question that should be nagging at you is: how are we defining ‘rational’?

Tversky’s work illuminated the mind’s susceptibility to error, sparking much reconsideration of decision making processes across a range of domains including law, philosophy, finance, and sports management – but obviously none coming under as much heat as the domain of economics did. Actually, the RAA is still a debate in economics today but the field is viewed with much more suspicion, deservedly.

Nevertheless, a significant weakness of the RAA that Tversky points out in his work, though I don’t think that the intention of his work was to critique the RAA (this is clear in his writing), is the idea that judgement under uncertainty is a sufficient condition for error prone thinking. That is, we often judge the prospect of a given decision incorrectly when the context in which we are making such a judgement is uncertain. The important thing here is that there are really no contexts we can find ourselves in which all facts of the situation are certain. So we are basically prone to error all the time – in that vein, can we really go ahead then and make the bold assumption that we act rationally as economic agents in the world? Doubtful.