“Our criticism of the accepted classical theory of economics has consisted not so much in finding logical flaws in its analysis as in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world.”
- John Maynard Keynes
Theories in Economics have often been criticised for relying on overly simplifying assumptions which are, many a times, in stark contrast to the actuality. Take, for instance, the most basic assumption - that of 'Rational choice'. According to this assumption, a person always reasons before taking an action (say, making a purchase) by weighing the pros and cons of the action against each other. However, in reality, individuals often base their choices on impulsive decisions; or sometimes they are not adept at judging what is good for them in terms of utility maximisation. Theories in Economics do not consider these inherent aspects of human behaviour.
Nonetheless, such assumptions are indispensable in formulating a theory and reaching some conclusion. They make it possible to study the interplay of a specific set of forces keeping other forces constant. Moreover, modern economists have been evaluating these unrealistic assumptions and there has recently been an increased interest in modeling non-rational decision making.
One such behavorial economist Dan Ariely has explained well in his book- Predictably Irrational, that how we are irrational and not just irrational but systematically irrational when it comes to the decision making.Ariely is involved in an engaging debate with an economist Tim Hartford ( another bestseller author of book- Logic of Life, explaining the opposite view on the subject of rationality).
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