Rationality Lecture 3

I am posting some brief summaries of some of the lectures for undergraduate behavioural economics to stimulate broader discussion. This lecture addressed the basic meaning of rationality in the areas of labour supply, intertemporal choice and saving outlining textbook undergraduate models in each of the domains. It further examined the basis of rational choice under conditions of risk, briefly outlining Von-Neumann Morgenstern utility functions, risk aversion and judgments of probability. Much of the course will examine how people make judgments of probability and frequency and use them to make decisions where actions have uncertain outcomes.

The lecture also briefly examined the connection between rationality and libertarianism. This is a very complex connection but one way of framing it is that rational individuals interacting in free markets are the best judge of their own welfare. A number of scholars argue for greater state intervention on the basis that individuals cannot implement fully rational decisions due to information processing and related constraints. On the other hand, a substantial volume of libertarian scholars argue that human rational choice is the best arbitrator of value and that state intervention, except in rare cases, restricts human freedom to maximise their own welfare based on their own standards. The tension between libertarian and paternalism and the role of rationality in this debate will be at the heart of the policy applications used in this course.