Rationality vs Reality: The Dissonance between Economic Models and Experimental Data

Rationality was not embedded in economic theory from its onset. In fact, the discipline started with a more holistic approach to human nature, incorporating notions of empathy and altruism. It was not until economics progressed and became more concerned with mathematical models and abstract theories that rationality entered the fray. Game theory, developed in the 1940s, established several axioms about human behavior that presented people as perfectly rational economic agents. It was not until behavioral researchers started investigating the question of rationality that the economic worldview was critically challenged. This research was the driving force in the development of behavioral economics. In particular, ultimatum game experiments demonstrate systematic deviations from rational decision-making. As more and more research has emerged documenting how observed human behavior challenges the predictions of neoclassical economic theory, mainstream economics has begun incorporating these ideas. The discipline has refined existing models while also developing new ones that go back to the roots of the field. Economic agents are no longer concerned only with themselves, but also with the welfare of others. After a substantial narrowing of scope, economics is broadening its view in conjunction with psychological theories