From 2015... Increasingly rational choice theory is viewed as a normative theory of rationality: what economic agents ought to do in order to be rational

Hands, D. Wade, Normative Rational Choice Theory: Past, Present, and Future (March 2015). SSRN: http://dx.doi.org/10.2139/ssrn.1738671

Abstract: The economics profession has traditionally viewed rational choice theory as a positive scientific theory. Normative economics was associated exclusively with ethics and should be kept strictly separate from positive scientific economics. This paper argues that the profession is changing in this regard. Increasingly rational choice theory is viewed as a normative theory of rationality: what economic agents ought to do in order to be rational. It is argued that the change initiated from within a community of critics – experimental psychologists – but it has now become widely accepted within many areas of economics. The paper explains this change and examines some of the possible causes and consequences of this development.

Keywords: rational choice theory, expected utility theory, demand theory, methodology, normative economics
JEL Classification: B2, B4


… psychological theories of intuitive thinking cannot match the elegance
and precision of formal normative models of belief and choice, but this is
just another way of saying that rational models are psychologically
unrealistic. (Daniel Kahneman, 2003, p. 1449)

0. Introduction
A specter is haunting microeconomics: the specter of normativity. Rational choice is the core theory of modern microeconomics and as such economists have traditionally considered it – in both its risky (expected utility) and risk-free (ordinal utility) instantiations – to be a positive scientific theory. In fact, for the majority of mainstream economists since the 1940s, rational choice was not only a positive-scientific theory, it was also a very powerful and successful scientific theory (at least when compared to the available alternatives from nonmainstream economics and/or the other social sciences). Although it was common to admit that real agents might not possess stable well-ordered preferences and/or to be able to complete the necessary computations in the way the theory asserts, such methodological foibles were considered relatively minor and did not undermine the economics profession's general support of rational choice theory. The consensus was that rational choice was a powerful theory that provided empirically supported and practically reliable predictions of, and explanations for, the behavior of economic agents: both individuals and more aggregate agents such as households, firms, and nations.

Of course while the majority of economists supported rational choice theory, there were also critics who strongly denied that it "provided empirically supported and practically reliable predictions of, and explanations for, the behavior of economic agents." Although such critics came in many different varieties and political-economic positions – from those inspired by Institutionalism or Marxism, to various Austrian positions – for the most part they also viewed rational choice theory as a positive scientific theory; they just thought it was not a very good scientific theory and that better alternatives were available. They argued either that rational choice theory did not accurately characterize (even approximately) the decision-making processes of real economic agents, or that it failed to accurately predict the observable behavior of such agents, or both; but for both the critics as well as the defenders within economics, rational choice theory was an attempt to provide a positive scientific theory of economic behavior.

This paper will argue that the economics profession has changed in this regard. Although the transformation is far from complete, the tendency during the last few years has been for economists to increasingly view rational choice theory (hereafter RCT) as a normative rather than a positive theory about the behavior of economic agents. The relevant normativity involves rationality, not morality – what one ought to do in order to be rational, not what one ought to do in order to be moral, good, etc. – but it is a normative interpretation and thus constitutes a radical departure from the way that RCT has traditionally been perceived among economists. It will be argued that this change initiated from within a community of critics – contemporary behavioral economics and associated work in experimental psychology – but it has increasingly spread to the wider community of economists. Although this interpretation of RCT is relatively new among economists, it has a long history in experimental psychology, decision theory, and various branches of philosophy. The paper discusses the history of the normative interpretation, the recent change within economics, and examines some of the possible causes and consequences of this development.


5. Conclusion
The purpose of this paper has been to explain the normative turn in recent experimental and behavioral economics, to suggest that it is beginning to be accepted more widely among economists, and to raise some questions about the causes and consequences of this change. Section two discussed the various arguments that philosophers have offered for the normativity of RCT – a theory of what one ought to do in order to be rational – and used the Friedman-Savage work on EUT during the 1950s as an example of the differences between the way that economists and philosophers have viewed RCT. Section two also made the case that economists have traditionally equated the normative exclusively with the ethically normative. Section three examined the results of the experimental and behavioral economics literature of the last few decades with a particular emphasis on the influence of experimental psychology. The many empirical anomalies of RCT were discussed and it was argued that the recently emerging heuristics-and-biases tradition in economics – like many philosophers, but unlike most economists (at least traditionally) – tend to view RCT as a normative theory of rationality. The case was also made in section three that economists seem to be changing their view of RCT in the direction of philosophers and those in the psychological tradition; this may be the case for economists more generally, but it is clearly the case for experimental and behavioral economists, even those who are not necessarily sympathetic to ideas from experimental psychology. The tendency for economists to view RCT as a normative theory of rationality and to separate the normative from the ethical was called the normative turn. The last section examined four of the many possible questions/concerns raised by the normative turn. The introduction of these four topics was intended to raise questions and further discussion on these various issues, not to defend a particular position regarding either the causes or the consequences of the normative turn. There seems to be little doubt about the presence of the normative interpretation of RCT within experimentally-based areas of economics and if the change is becoming more widespread, as it was suggested here, the impact will be quite significant. It is too early to tell what all this might eventually mean, but this paper has been an attempt to make the reader aware of the change and to draw attention to some of the possible consequences.