Emotions in Economics: Maximization Need Not be Rational

Abstract

Lab experiments have revealed that animals sometimes outperform human-beings in terms of instrumental rationality. The current essay argues that constrained maximization tendency with consistency of preferences are perhaps genetically imbibed behavior of organism, and such examples display a behavior which is a-rational, i.e. not in the ambit of rationality. Examining the concept of rationality from the perspective of Dual-Systems theory, the current paper asserts that, by virtue of its similarity to animal cognition a part of human mind (system-1) is a myopic and impulsive maximizer with nature defined preferences outside rationality domain.

This impulsive and myopic nature of maximization explains why phenomenon like choice overload, regret for non-maximizing choices could be observed in human behavior, and why addiction can not be termed as rational.

Emotions as a basis of human action has eluded economic theory, and this essay attempts to fill this gap by introducing emotions as a basis for economic action by explaining why people in the state of arousal (dominated by system-1) act differently than their own sensible self (with system-2 as a watchdog) when they are cool.