Rational Economic theory

November 14, 2015
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In economics, game theory, decision theory, and artificial intelligence, a rational agent is an agent that has clear preferences, models uncertainty via expected values of variables or functions of variables, and always chooses to perform the action with the optimal expected outcome for itself from among all feasible actions. A rational agent can be anything that makes decisions, typically a person, firm, machine, or software.

Rational agents are also studied in the fields of cognitive science, ethics, and philosophy, including the philosophy of practical reason.


In reference to economics, rational agent refers to hypothetical consumers and how they make decisions in a free market. This concept is one of the assumptions made in neoclassical economic theory. The concept of economic rationality arises from a tradition of marginal analysis used in neoclassical economics. The idea of a rational agent is important to the philosophy of utilitarianism, as detailed by philosopher Jeremy Bentham's theory of the felicific calculus, also known as the hedonistic calculus.

The action a rational agent takes depends on:

  • the preferences of the agent
  • the agent's information of its environment, which may come from past experiences
  • the actions, duties and obligations available to the agent
  • the estimated or actual benefits and the chances of success of the actions.

In game theory and classical economics, it is often assumed that the actors, people, and firms are rational. However, the extent to which people and firms behave rationally is subject to debate. Economists often assume the models of rational choice theory and bounded rationality to formalize and predict the behavior of individuals and firms. Rational agents sometimes behave in manners that are counter-intuitive to many people, as in the traveler's dilemma.


Many economic theories reject utilitarianism and rational agency, especially those that might be considered heterodox. For example, Thorstein Veblen, known as the father of institutional economics, rejects the notion of hedonistic calculus and pure rationality saying: “The hedonistic conception of man is that of a lightning calculator of pleasures and pains who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift him about the area, but leave him intact." Veblen instead perceives human economic decisions as the result of multiple complex cumulative factors: “It is the characteristic of man to do something, not simply to suffer pleasures and pains through the impact of suitable forces. He is … a coherent structure of propensities and habits which seeks realization and expression in an unfolding activity. … They are the products of his hereditary traits and his past experience, cumulatively wrought out under a given body of traditions conventionalities, and material circumstances; and they afford the point of departure for the next step in the process. The economic life history of the individual is a cumulative process of adaptation of means to ends that cumulatively change as the process goes on, both the agent and his environment being at any point the outcome of the last process.” Evolutionary economics also provides criticisms of the Rational Agent, citing the “parental bent” (the idea that biological impulses can and do frequently override rational decision making based on utility). Arguments against rational agency have also cited the enormous influence of marketing as proof that humans can be persuaded to make economic decisions that are “non-rational” in nature.

Alternate Theories[edit]

Neuroeconomics is a concept that uses neuroscience, social psychology and other fields of science to better understand how people make decisions. Unlike rational agent theory, neuroeconomics does not attempt to predict large-scale human behavior but rather how individuals make decisions in case-by-case scenarios.

Artificial intelligence[edit]

Artificial intelligence has borrowed the term "rational agents" from economics to describe autonomous programs that are capable of goal directed behavior. Today there is a considerable overlap between AI research, game theory and decision theory. Rational agents in AI are closely related to, autonomous software programs that display intelligence.

See also[edit]

Economics Software


Economics and game theory
  • Osborne, Martin; Rubinstein, Ariel (2001), A Course in Game Theory, Cambridge, Mass.: MIT Press, p. 4,
  • Veblen, Thorstien (1994), Theory of the Leisure Class
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