How Economic Models Missed the Mark The foundation of traditional economics, particularly in the classical and neoclassical schools, rests heavily on the assumption of absolute rationality in human decision-making. According to this hypothesis, individuals are assumed to act logically and in their self-interest, seeking to maximize utility or profit in all economic transactions. This rational actor model has been foundational in shaping economic theory and policy, influencing everything from market behavior to the design of economic institutions (Friedman, 1953). However, over time, critiques from within the field of economics, especially from the perspective of behavioral economics, have called into question the validity of this assumption. Traditional economics are built on the premise that economic agents make decisions that are perfectly rational, using all available information to maximize their utility. The core of this assumption can be traced back to Adam Smith's (1776) work on the "invisible hand," where he argued that individuals acting in their own self-interest unintentionally promote the public good. This notion of rationality assumes that human behavior is driven purely by logical calculations and a clear understanding of future consequences. Neoclassical economists such as Alfred Marshall (1890) and Lionel Robbins (1932) expanded on this idea by formalizing models that assume agents have well-defined preferences and act in a way that maximizes utility. However, Herbert Simon (1955) introduced the concept of "bounded rationality," challenging the idea of absolute rationality. Simon argued that humans, while rational within limits, do not have the cognitive resources or the information to make perfectly informed decisions. Instead, people engage in "satisficing"; which refers to a decision-making strategy that involves choosing an option that meets a minimum set of criteria or requirements, rather than seeking the optimal or best possible solution. It is a combination of the words "satisfy" and "suffice." The concept was introduced by economist Herbert Simon in the 1950s, suggesting that individuals often settle for a solution that is "good enough" rather than spending excessive time and resources searching for the perfect one. Simon's work laid the foundation for much of behavioral economics, which seeks to explain decision-making with a more nuanced view of human behavior, incorporating psychological and emotional factors that traditional models ignore. The notion that individuals are purely rational actors, unaffected by emotions, physical conditions, or external influences, has been increasingly scrutinized and challenged by several scholars from the field of behavioral economics. Daniel Kahneman and Amos Tversky (1979), in their groundbreaking work on the prospect theory, demonstrated that humans often make decisions based on perceived gains and losses rather than purely rational, objective calculations. Their research revealed that people tend to value potential losses more heavily than equivalent gains, illustrating how emotional and psychological factors can significantly influence decision-making processes. In their experiments, they showed that individuals tend to fear losses more than they value equivalent gains, a phenomenon known as loss aversion, which contradicts the classical assumption that decisions are made purely based on objective utility maximization. Moreover, the environmental influences on decision-making cannot be overstated. Richard Thaler (1985), in his work on mental accounting, showed that individuals do not always treat money in a fungible manner. People are influenced by the way they mentally categorize their finances, which can lead to irrational decisions. This finding further undermines the traditional view that humans always act rationally in economic situations. Thaler and Kahneman were jointly awarded the Nobel Prize in Economic Sciences in 2017 for their groundbreaking contributions to the development of behavioral economics. Their research underscores the critical influence of psychological factors on economic decision-making, fundamentally challenging traditional economic theories that assume individuals consistently act as rational agents. The role of government and social influences on economic behavior is also significant. Government policies, cultural norms, and societal expectations often shape and constrain the decisions of individuals, a point that traditional economics tends to overlook. For example, John Maynard Keynes (1936) argued that government intervention in the economy through fiscal policy could correct market failures and stimulate demand during times of economic downturn, implicitly acknowledging that individuals do not always act in a rational or self-interested manner. Furthermore, Amartya Sen (1999), in his work on development and freedom, emphasizes that social and institutional structures influence people's choices and opportunities, which may deviate from purely rational economic decisions. Given the overwhelming evidence from behavioral economics and psychology, the concept of absolute rationality must be reappraised. The failure of traditional economic models to account for emotional, psychological, and social influences on human decision-making has led to a shift in how economists understand economic behavior. The biases and heuristics that shape decision-making processes, as outlined by Kahneman (2011) in his book Thinking, Fast and Slow, suggest that human reasoning is often influenced by cognitive shortcuts rather than purely rational thought. Simon's concept of bounded rationality, Kahneman's prospect theory, and Thaler's mental accounting collectively highlight the necessity of moving beyond the traditional rational actor model in economics. These frameworks demonstrate that human behavior in economic contexts is not solely governed by logic and self-interest but is profoundly shaped by emotions, cognitive biases, and the situational context in which decisions occur. Consequently, it becomes imperative to reevaluate the traditional economic assumption that all human decisions are rooted in inherent rationality, acknowledging the nuanced and complex factors that influence real-world decision-making. The argument for abolishing the assumption of absolute rationality in economic theory is not to reject the usefulness of traditional economic models but to expand them to incorporate a more realistic understanding of human decision-making. As George Akerlof and Rachel Kranton (2000) assert in their work on identity economics, social identity and the psychological aspects of decision-making must be incorporated into economic models to more accurately reflect the complexity of human behavior. This expanded view of economic decision-making allows for a more comprehensive understanding of how individuals make choices and how these choices, in turn, influence economic outcomes. Thus, traditional models that rely on the assumption of absolute rationality should be queried and reexamined. Absolute rationality in appraising human decisions in generality has created major flaws of the conclusions of any perception that receives consent from such misapprehensions. Economic models must evolve to reflect the full range of human motivations, which are shaped by cognitive, emotional, and social factors. Therefore it is imperative to reappraise the suppositions that emanated from former inaccuracies as it would be erroneous to continue giving ambiguity the credit of absolute sagacity. This shift in perspective will pave the way for more robust and accurate economic analyses that account for the real-world complexities of decision-making and wealth accumulation. By integrating psychological and contextual factors into economic models, we can develop a deeper understanding of human behavior and design policies and systems that are more aligned with how individuals and societies actually operate. Certainly, in the bid to create theories, assumptions must be made. However, it is equally important to establish a variation of reality in theoretical models that accurately reflects the practicalities of human life Jonathan St. B.T. Evans, in his article Rationality and the Illusion of Choice, encapsulates this idea succinctly by asserting that - "It is evident that the need to apply a normative theory creates problems that are not present in other parts of cognitive psychology because we can debate whether such theories are correctly formulated or appropriately applied. However, it is far from obvious to me why in itself this should lead to a rationality debate. Why is a person wrongly identifying a face merely mistaken, while a person failing to maximize utility or making a logical error irrational? As we have seen, in most parts of cognitive psychology, evidence of error is not seen as evidence of irrationality. In fact, it seems quite ludicrous to suggest, for example, that someone falling prey to a standard visual illusion is being irrational. So there must be more to this problem than simply the ambiguity involved with norm referencing" (Evans, 2014). This observation highlights a fundamental critique of theoretical models, especially those that purport to define rationality while disregarding the complex and multifaceted nature of human behavior. It underscores the need for more nuanced frameworks that better reflect the intricate interplay of cognitive, emotional, and contextual factors influencing decision-making. Traditional theories frequently depict humans as solely self-interested actors. However, as Amartya Sen (1977) observes, "Humans are capable of actions motivated by a sense...
