What Economists Get Wrong About Choice
Sometimes behavior that may seem irrational is really rational choice in disguise
The philosopher Arthur Schopenhauer tells the story of an elephant traveling through Europe, crossing many bridges. The elephant stops dead at one rickety bridge, even after seeing men and horses cross, having sensed that the bridge cannot bear its weight. The defiant elephant illustrates the intuition behind much of economics: When a decision really matters, people—even animals—are pretty smart.
We apply these smarts to getting what we want. In economics terms, to optimize. According to rational choice, the central premise underlying neoclassical economics and much of modern thought across disciplines, our preferences, resources, and information dictate how we select among available options. Do I renovate the kitchen or go on a vacation? Do I take the scenic route or hurry home to watch TV? Comparisons, whether complicated or simple, are at the heart of the rational choice model. To choose between options, we can assign each one value based on our preferences and how much we already have.
Optimization requires that the utility we derive from the last dollar spent on each good or service is the same as the utility of the last dollar spent on every other good or service. If it weren’t, we could…
