Title
Rational Irrationality: A Two Stage Decision Making Model
Authors
Abstract
This paper proposes a mathematical two-stage decision making model based on dual-decision models from behavioral economics that includes, in addition to cognitive and affective systems, an individualistic human factor and a stochastic shock. The model provides a new vision of the decision-making process and the impact of individualism. In the first stage, the agent’s initial willingness to choose is obtained following traditional economic theory but including an individual human factor, which is composed by the learning process, free will, and other human factors. This allows us to explain the reason why sometimes people are inclined to choose options that seem to be irrational decisions from the view of traditional economics logic. In the second stage, the model explains how the cognitive and affective systems and the influence of a stochastic shock affect the initial willingness to choose, obtained in the first stage. The shock might be produced by those negative and/or positive feelings and information not known or considered previously that allows the individual arrive to the final decision. Finally, our model demonstrates that the individual human factor and the stochastic shock are fundamental elements that define the rational irrationality when traditional economic theory fails to explain individuals’ choices.
Keywords
Decision making, Expected utility, Behavioral economics, Cognitive and affective systems, Human factor
Classification-JEL
C44, C90, D03
Pages
1-39
How to Cite
Acevedo, R. A., Aponte, E., Harmath, P., & Mora, J. U. (2021). Rational Irrationality: A Two Stage Decision Making Model. Advances in Decision Sciences, 25(1), 1-39.