Extending the Bounds of Rationality: Evidence and Theories of Preferential Choice

TLDR

Economists define rationality by consistency principles that set bounds from perfect consistency to weak stochastic transitivity, and decades of preferential choice research have shown systematic violations of these bounds that are interconnected and reflect behavioral principles. The paper examines the robustness of violations of rationality bounds, reviews predictive theories, and explores their adaptive functions. The authors analyze violations by reviewing predictive theories and evaluating their adaptive functions. They find that choices reveal not only preferences but also subtle, reasonable dependencies on the environment.

Abstract

Most economists define rationality in terms of consistency principles. These principles place “bounds” on rationality—bounds that range from perfect consistency to weak stochastic transitivity. Several decades of research on preferential choice has demonstrated how and when people violate these bounds. Many of these violations are interconnected and reflect systematic behavioral principles. We discuss the robustness of the violations and review the theories that are able to predict them. We further discuss the adaptive functions of the violations. From this perspective, choices do more than reveal preferences; they also reflect subtle, yet often quite reasonable, dependencies on the environment.