(Limited) rationality and homo economicus

The concept of rationality is closely related to the economic principle or economic action and the associated value questions. In general, it is a term that refers to rational thinking and acting oriented towards goals. The term is very complex and multifaceted and is examined above all in philosophy and theory of cognition. In economics, rationality is usually equated with utility maximisation, which in turn implies efficiency against the background of scarce resources. In other words, economic and rational action means pursuing the goal of maximising benefits efficiently, i.e. in accordance with the economic principle.

However, beyond a purely instrumental rationality understood in this way, which only considers the efficiency of a measure, important questions arise with regard to the goal of maximising benefits, in particular whose benefits are to be maximised, how the benefits are to be distributed and how negative effects for third parties are to be dealt with:

• Should only the benefit of the acting actor be maximized (maximization of self-interest, homo economicus)? For example, the purchase of the cheapest product regardless of its possibly problematic social and ecological production.
• Is the benefit of the directly involved interaction partners to be maximized and how should the benefit be distributed between the partners? Corresponding questions arise, for example, in the distribution of cooperation profits within the framework of employment contracts or in globalisation.
• Should the benefits of all be maximized (which corresponds to the position of utilitarianism)? In this case, it would be more precise to ask who 'everyone' is (for example, the population of a country or the whole world). Furthermore, measuring or even estimating the (expected) benefit of a measure is difficult due to numerous interdependencies. Regardless of these detailed questions, problems such as external effects and social dilemmas often arise that could be solved. Corresponding decisions are usually to be made by (supra-)governmental organisations and not by individuals, since the latter usually aim predominantly at maximising their own benefits.

Within the framework of neoclassical and economic behavioral theory, these questions are clearly answered with reference to the model of the homo oeconomicus who wants to maximize his own benefit and acts in this manner. In the Neoclassical period the problems of rational decision making are largely hidden by ignoring transaction costs and the assumptions of complete information and unlimited information processing possibilities of individuals. With regard to everyday economic decisions (e.g. conclusion of a mobile phone contract) the unrealistic nature of such a position becomes clear. The concept of bounded rationality, developed by Nobel Prize winners Daniel Kahneman and Vernon Smith, among others, is a more meaningful explanation of human actions in economically influenced life situations. This concept takes into account both the costs of obtaining information and the limited mental capacity of the actors. As a result, in most cases people do not consider all action alternatives and the search for further options is abandoned as soon as at least one sufficiently attractive option has been found (satisficing instead of maximizing). The alternatives found in this way are also not evaluated mathematically exactly, but by means of simpler decision rules (heuristics). Although this limits the decision-making effort, it can lead to clearly suboptimal results, especially since people are exposed to typical errors of reasoning in their decisions.

In addition to the assumption of rational decision making, the goal of maximising benefits in the model of the homo economicus is criticised by behavioural economics and experimental economic research as being too far removed from reality, based on numerous empirical documents. While this does not alter the usefulness of the homo economicus model for the analysis of specific issues (e.g., for designing institutions to reduce the negative consequences of external effects and social dilemmas), the limits of its scope should be seen and not applied to all economic issues and life situations.

For economic education, the categories and interrelationships mentioned above are important because ...

- the economic principle, efficiency and (limited) rationality are at the core of economic theory and, to a certain extent, of economic action;
- the use of models (e.g. the model of homo oeconomicus, who acts efficiently, rationally and in a way that maximises self-interest) is often helpful in economic situations, as they reduce their complexity in a targeted manner and thus make them easier to understand. At the same time, the limitations of models can be clarified by questioning the model premises. This also makes it clear that different models have to be applied depending on the issues involved;
- the assumption of the self-interest maximising actor is accompanied by a sensitisation to associated problems (e.g. external effects, justice deficits) and an understanding of the necessity of their solution (e.g. with institutions). In this way, the ethical component of economic activity also becomes clear;
- learners can improve the quality of their decisions in economically influenced life situations by dealing with the concept of limited rationality and the associated errors of reasoning.

Efficiency, rationality and the economic principle are closely related to other ways of thinking such as need, utility, goods, externality, social dilemma, justice.