Rational Individual Behavior in Markets and Social Choice Processes

Abstract

This paper reviews a series of paradoxes that exist in the experimental economics literature. These paradoxes are instances in which otherwise accurate models of markets and social choice processes fail to capture the data of experiments. A loosely developed theory called The Discovered Preference Hypothesis is advanced in the paper as an explanation. Behavior seems to go through stages of rationality that begin with a type of myopia when faced with unfamiliar tasks. With incentives and practice, which might take the form of repeated decisions in the experimental work, (but might include play, banter, discussions with others, stages of commitment, etc.) the myopia gives way to what appears to be a. stage of more considered choices that reflect stable attitudes or preferences (as opposed to the labile attitudes identified by psychologists). Social institutions are seen as playing a role in the attainment of a third stage of rationality in which individual decisions incorporate the rationality of others, or the lack of it, in their own decisions.

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