1 - Rationality, Preferences, and Utility Theory

Summary

Mainstream economics portrays individual agents as choosing rationally. Many of its generalizations concerning how people actually choose are also claims about how agents ought rationally to choose. Chapter 1 focuses on the conception of rationality that is incorporated in contemporary economics and is central to it. It begins with the concept of preferences, which is the central concept in mainstream economics, and with the theory of rationality that focuses on preferences. The fact that a normative theory lies at the foundation of economics raises philosophical questions. What are requirements of rationality doing in what purports to be a scientific theory of economic phenomena? After presenting the axioms of ordinal utility theory, it offers an account of preferences, a critique of revealed preference theory, and an introduction to expected utility theory. It argues that if one wants to understand economics, the modeling of rationality is the place to begin.