The Debate about the Rational Choice Model

Saransh Gupta, NYU Stern, Rising Junior, Summer 2024 The rational choice model, which is the idea that people make decisions based on maximizing incentives, is crucial to microeconomics, explaining how individuals make decisions and interact in markets. Economist Adam Smith highlighted this in his The Wealth of Nations  book in 1776 ,   “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages” (Smith, 1776). Smith's idea is that people aim to maximize their benefits from transactions and could always be happier with a different basket of goods. This model implies that free markets promote a productive society by providing incentives for utility-maximizing individuals to benefit each other.  Evidence shows success in economic systems based on the rational choice model.  Storr and Choi found that market societies rank higher on measures of morality and social capital. For example, the top five countries in charitable giving are market societies, while the bottom four are non-market societies   (Storr and Choi, 2019) . This suggests that free market models benefit not just individuals but society, reflecting Smith’s narrative of the benefits of surpluses from economic transactions. Economist Gary Becker argues that the rational choice model is essential for economic decision-making, asserting that it "[applies] to all human behavior" (Becker, 1976) . Dr. John Tauras highlights that assumptions in the rational choice model, while not necessarily true, enable useful predictions on a societal level.  However, critics argue that individuals often don't behave as predicted by rational choice. An experiment at a daycare showed that a fee for late pickups led to nearly double the number of late arrivals, suggesting that incentives can be less effective   as compared to social obligation (Gneezy and Rustichini, 2000) . Haaroon Hayat, an NYU student, notes that models used in his introductory economics courses could be confused with how people make decisions. Dr. Mary Hirschfeld encourages economists to recognize the limitations of rational choice and participate in a larger cultural conversation to determine where their models can be beneficial ( Hirschfeld, 2018 ). The quantitative tools that economists use can provide mathematically-testable hypotheses, and therefore real insight into human behavior, but it's important to understand that those tools simplify human nature and are not always the most effective framework for social analysis. Interviews: Dr. John Tauras, UIC Haaroon Hayat, NYU undergraduate Sources: Becker, Gary S. The Economic Approach to Human Behavior . University of Chicago Press, 1976. Accessed 22 July 2024. Gneezy, Uri, and Aldo Rustichini. “A Fine Is a Price.” The Journal of Legal Studies , vol. 29, no. 1, 2000, pp. 1–17. JSTOR , https://doi.org/10.1086/468061 . Accessed 22 July 2024. Hirschfeld, Mary L. Aquinas and the Market: Toward a Humane Economy . Harvard University Press, 2018. McShane, M. Q., et al. Conservative Persuasions: An Introduction for College Students. American Enterprise Institute, 2022, https://books.google.com/books?id=6lqjzwEACAAJ . Smith, Adam. The Wealth of Nations.  Edited by Andrew Skinner, Penguin Publishing Group, 1999. Storr, Virgil Henry, and Ginny Seung Choi. Do Markets Corrupt Our Morals?  Springer International Publishing, 2019.