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Are People Rational (in the economist's sense) and Reasonable (in the

lawyer's sense)?

Both concepts of rationality and reasonableness indicate a process of reasoning by


anticipating and analysing the consequences of their potential actions and establishing a
list of preferences, depending on the anticipated consequences. A rational person, having
established their list of preferences, will choose the action which will maximise their utility.
There are many different variations of rationality which will be outlined later in this essay.
In order for a person to be rational their list of preferences must be complete and transitive
as well as choosing the preference that maximises their utility. Ulen (1999) 'Consumers
have transitive preferences and seek to maximise the utility that they derive from those
preferences, subject to various constraints.' A reasonable person will also analyse the
consequences of their actions to create a list of preferences in a similar way to a rational
person but they will also consider the welfare of others in their decision and adjust their list
of preferences accordingly. In this essay I will look at how a variety of different factors, both
direct and indirect will affect a person's ability to act rationally, reasonably or in some
cases both. I will also make a comparison between rationality and reasonableness in
people and rational and reasonable corporations.

A purely rational person is completely self-interested and will only look to maximise their
own preference function and will have no consideration for the welfare of others. Macesich
(1997) '.....the economist's concept of a rational person is one who seeks to maximize his
or her own self-interest. His or her concern for the well-being of others is limited. The self-
centred drive produces outcomes in which private and social costs diverge. As a
consequence, outcomes can conflict with society's general interest.' Pure rationality is
present in only the minority of people as most people involve other people's welfare or
utility in their decision-making, to varying degrees. A purely rational, self-interested person
can never be reasonable. The actions of a purely rational person may coincide with those
of a reasonable person but nevertheless they can never be reasonable. Immanuel Kant's
argument was that of moral duty, where one has the duty to act, regardless of the
consequences. Connolly (1959) 'If I carry out the action enjoined by a moral law (e.g. “Act
justly”) for the sake of pleasing or obeying an external lawgiver, e.g. God, my action is not
on that account morally good......The principle is: “I ought to act justly, if I wish to please
God.”' This indicates that a person can only be reasonable if they are acting because it is
morally right and not just to avoid a particular penalty. Kant's example can be illustrated in
a modern example where by a company will only increase their employee's wages due to
statutes enforced by law, not because their employee's are paid barely enough to live on.
This example shows the company being entirely rational but not reasonable as they are
only improving their employee's welfare to avoid the penalty of the statute, this action
cannot be reasonable under Kant's argument. The state of mind of the decision-maker is
critical to whether they are reasonable,[that is, whether] there needs to be consideration
for other people's welfare.

There are different levels of rationality. A purely rational person is only self-interested and
will look to maximise their utility regardless of the effect on other parties, whereas
someone can still be rational and consider other people's welfare. People can still be
rational even if they put other's preferences ahead of their own. Ragnar Frisch argued that
rational people may also consider other people's functions when making decisions. It may
be the case that the preference function of other's preferences takes priority over one's
own preference function. Frisch's illustrated this point with an example of him and his wife
having two cakes for dessert and Frisch's wife tells him that he may help himself. Frisch's
main concern is not which of the cakes would satisfy his own utility function but which one
of the cakes would satisfy his wife's utility function, once decided on his wife's preferred
choice he would choice the other cake, his wife's second priority. Sen (2004) '.....Frisch's
characterization of the problem is not one of maximization of a compound personality utility
function that incorporates his altruism towards others.......Rather, the other person's well-
being remains a separate concern, of which note has to be taken over and above the
extent to which it enters what Frisch calls “my own total utility function.”' By putting his
wife's preferences ahead of his own and giving his preferences no weight it can be argued
that Frisch is not being reasonable at all, not to his wife but to himself. 'You shall love your
neighbour as yourself.' Matthew 22:39 (1971) The Bible indicates that one should give
equal weight to their own preferences and to those of others. By giving no weight to your
own preferences, you are not being reasonable to yourself and if you consider no one
else's preferences other than your own then you are purely rational and again not being
reasonable. This concept is limited to a small group of people, this would generally apply
to people you know well or family members. The welfare of people that you don't know
particularly well or not at all would not feature very much in your decision-making.

As shown rational people have the capacity to go beyond the boundaries of self-interested
actions and involve other people's preferences in their decision making. Sen (1994) 'A
divergence between choice and well-being can easily arise when behaviour is influenced
by some motivation other than the pursuit of one's own interest or welfare (eg. through a
sense of commitment, or respect for duty).'

The simple concept of rationality has many different direct and indirect factors that can
affect the complexity of the decision that one faces. Chooser dependence and menu
dependence show that rationality and subsequent decisions that one will take cannot be
understood from merely looking at on people’s preferences. Sen's argument of chooser
and menu dependence was that people are still rational even when considering other
people's preferences, which went against the traditional view of rationality.

Chooser dependence indicates that decisions will depend on who is choosing, Sen (1997)
'…….you may prefer mangoes to apples, but refuse to pick the last mango from the fruit
basket, and yet be very pleased if someone else were to “force” that last mango on
you…….' Amartya Sen's example of the fruit basket shows that one would be reluctant to
take the last mango from the fruit bowl due factors such as reputation or social
commitment and morality but will anticipate that someone else's decision may improve
their own welfare. This is the process of acting to allow another person to choose for you.
This decision is rational, despite refraining from taking the last mango due indirect factors,
as the anticipation of an improvement in their welfare through the decisions of others is
self-interested and not at all reasonable, as you are wanting someone else to make the
decision for you. Menu dependence is the concept of choice being dependent on the set of
available options or menu, but it is also influenced by the perceptions of others. Sen
(1997) 'if the set of available options is expanded ….containing two mangoes and two
apples, person i may have no difficulty in choosing a mango since that still leaves the next
person with a choice over the two fruits' Menu dependence is rational, as you do not want
to be perceived as only self-interested, but it can make you unreasonable in certain
circumstances. Sen (1997) '.....when our knowledge is limited, the menu may have
epistemic importance...... For example, if invited to tea (t) by an acquaintance you might
accept the invitation rather than going home (0), that is, pick t from the choice over {t, O},
and yet turn the invitation down if the acquaintance........offers you a wider menu of either
having tea with him, or some heroin and cocaine (h), that is, you may pick 0, rejecting t,
from the larger set {t, h, 0}.' In this case menu dependence can create an unreasonable
judgement just by looking at the menu on offer. Sen's example illustrates that one may
judge the person offering drugs in a negative fashion just because of the change in menu.
These judgements are based on assumptions about the person and a rejection of the
wider menu, instead of just the offer to drugs, would be entirely unreasonable.

It can be argued that rationality and reasonableness are dependent on the situation that
the decision-maker is presented with. There are a number of indirect and direct factors that
may affect their decisions. Reputation can be a contributing factor as one may not want to,
for example take the last piece of cake. This process of reasoning is in line with wanting to
be perceived by others as a considerate person, this is an entirely rational act as one will
anticipate gaining from this reputation in the future. The act of refraining from taking the
last piece of cake can be seen as reasonable as well as rational but if one is acting to
benefit rather than considering other people's utility then it is not reasonable but purely
rational. Sen (1997) '(“reputation and indirect effects”) is most in harmony with the
established conventions of standard neoclassical economics. It does not require any basic
departure from the ultimate concentration on culmination outcomes (and from rational
choice guided only by self-interest).' Other factors that affect the decision-making are that
of social responsibility and morality. Some people may see taking the last piece of cake
and depriving others of the cake as immoral. The decision-maker's welfare will be taken
into consideration as other people's perceptions can directly affect their welfare. Sen
(1997) 'The person's well-being may be affected directly by the process of choice (for
example, by what people think of her – she may not enjoy the looks she gets as she
makes a dash for the great chair)' This a rational approach as the reaction and perception
that one gets from others is self-interested.

Feelings towards others may also influence a decision-maker, for example sympathy
where one may maximise another person's preference function and thereby improving
improving one's utility function. Factors such as sympathy can be seen as both rational
and reasonable, as one is considering another person's utility and placing it ahead of their
own and by doing so increasing their own welfare. But as argued previously, one might be
reasonable to someone else by putting their preferences ahead of their own but will not
necessarily be reasonable to themselves. I believe that one cannot be completely
reasonable if they are giving no weight or very limited weight to either their own
preferences or that of someone else's. This concept does not extend to everyone but only
to a finite number of people. Binmore (2005) '.....to recognize that we sometimes care a lot
about the welfare of some other people isn't to concede that we always care a lot about
everybody. The contrary view is sustained only by turning a blind eye to anything but the
good relations that commonly hold within circles of close friends and the family.' The
extract from the Bible shown earlier, and the extract from Natural Justice by Binmore,
corroborates this as it indicates that you should give your neighbour's preferences equal
weight, for example friends or family members.

The indirect factors mentioned above would be far more prominent in the mind of a
reasonable person as to a rational person. One measure of unreasonableness is whether
an act can been seen as a loss to another party. A reasonable person will look to minimise
the size of a negative externality that he or she may cause on another person. A negative
externality refers to the uncompensated adverse impact of one's actions on the well-being
of another person. For example the trapping of a burglar who breaks into your house
would be seen as a negative externality to the burglar, it would be a smaller negative
externality than if you trapped the burglar and then beat him to death. A reasonable person
will act in a proportionate manner whereas a rational person may see beating the burglar
to death as a maximisation of their preferences and fail to consider the negative externality
that they would inflict on the burglar. In most cases a reasonable person will look to create
a Pareto improvement, whereby one's actions will bring about a change that benefits at
least one person without anyone else being made worse off. In some cases a person can
still create a negative externality and still be reasonable, as the negative externality
created is seen as just. Using the example above a reasonable person, although causing
the burglar a negative externality, it is seen as just as the burglar broke into the person's
house.

So far I have assumed that people are willing to make a decision given the factors
presented to them in a particular situation. In many situations people are averse to making
a decision either through the complexity of the preference presented and the inability to
make a definitive preference list or the person not wanting to take responsibility for the
decision. Sen (1997) 'The responsibility associated with the choice act can take many
different forms. It can be particularly “heavy” when a person has to act on behalf of others
in a fiduciary capacity. In so far as choosing over the lives of others can be avoided, many
may well prefer that.' In many scenarios people are influenced by the people around them.
If a person makes the same decisions as others purely because of other's preferences
they can been seen as opting out of rationality, although they still show a degree of
reasoning. By avoiding making a decision on their own and simply choosing what
everyone else has chosen the person is still taking into consideration the perceptions they
may receive. This sheep behaviour of making the same choice as everyone else they will
avoid any adverse perceptions.

Many of the characteristics of rationality and reasonableness within people can be


transferred to corporation reasoning. The traditional concept of a corporation was that the
primary objective was to maximise the shareholder wealth. This was an entirely rational
approach to business as they were looking to maximise their utility function, in this case
profit. During the modern age various pressures have been inflicted on corporations
through politics and environmental organisations which have made corporations consider
much more thoroughly the preference functions of other stakeholders. The question
associated with corporations is, have corporations become reasonable rather than purely
rational?

Corporations have been required to consider other stakeholders, such as the environment,
employees, suppliers and the government. By listening to all the preferences of a
corporation's stakeholders and trying to make a just and reasonable decision on their
needs and requirements involves the concept of natural justice. Natural justice requires the
corporation to consider the preferences of each stakeholder and give them equal weight in
their decision-making, whereas a rational corporation would take the shareholders'
preferences as the priority and the preferences of other stakeholders as carrying far less
weight. It also requires the judge of the decision to be wholly impartial and not to be biased
in any way towards the parties involved. Lloyd (1962) 'One of the circumstances under
which a decision is reached and is often thought to make it validly or invalidly reached is,
of course, the partiality or impartiality of the person making the decision. Both the rightness
of the decision and the impartiality of the judge can be called justice or fairness.'
According to the concept of natural justice the judge may not judge a situation which
involves the judge itself. This creates a unique situation where decisions must be made
involving the corporation and all its stakeholders but the corporation may judge how much
the preferences of other parties are included. This begs the question whether a
corporation can ever be reasonable.

According to Kant the state of mind is critical when determining whether someone or, in
this case something, is reasonable. The state of mind of a corporation would relate to a
relevant person involved in the corporation, for example the chief executive. The strong
determinant of corporate reasonableness would be the state of mind of a relevant person
within the corporation. I believe that senior management should be the basis of a
corporation's state of mind as these are the people who make the firm's decisions.
Although in a legal sense the corporation is a separate legal personality from it's
managers, in the context and rationality and reasonableness the state of mind should be
based on the senior management. Although a corporation may not have a mind in itself,
the senior management who consider many factors in making their decisions, for example
the maximisation of shareholders' wealth and employee welfare, can be seen as the mind
of the corporation.

Corporate rationality is much more cut and dried as it is purely to maximise shareholders'
wealth, whereas corporate reasonableness is much more difficult to define. I believe that a
corporation can never truly be reasonable under the terms of natural justice as they are
biased when considering all their stakeholders. This biased viewpoint, combined with
pressure from shareholders to increase profit, often at all costs, cannot make a corporation
reasonable. Many concepts relating to people can be applied to corporations, a
corporation can make a reasonable decision, for example, to give a percentage of their
profit to combat climate change, but this decision may not be reasonable as the decision
was purely based on improving the corporation's reputation and in turn increasing profit.
This relates to Kant's concept of moral duty, where a reasonable act should be taken
because it is morally right and not for any other reason. If a decision is taken to increase
their profits or improve their reputation then the decision is only rational. Once again this
relates to the state of mind which is difficult to define when considering a corporation.

In conclusion I believe that everyone has a degree of rationality within them. The level of
rationality is very much dependent on the factors they are presented with in a particular
situation. When making decisions, the vast majority of people will involve a wide range of
factors in their analysis. I believe that acting rationally is a much more natural action. As
many theorists have argued one can make a broad range of different decisions and still be
rational, whether they are putting someone else's preferences ahead of their own or
whether they are acting because of the potential perceptions they will get from others.
These decisions all carry a degree of rationality and in some cases carry nothing but
rationality, whereas acting in a reasonable fashion is more constrained by many theories.
In order to be reasonable one must consider everyone's preferences and give them equal
weight as well as giving equal weight to their own preferences. Kant's theory of moral duty
combined with the concept of Pareto improvement is the best way to identify
reasonableness. This is where one person's morally right actions will create a benefit for at
least one other person without making anyone worse off.

People have the capacity to be both rational and reasonable. The majority of people
involve elements of rationality and reasonableness when making decisions in social
context, for example other people's preferences. Consumer decisions are far more rational
than social decisions. Although one may take into account other factors in consumer
decisions, for example fashions of designer clothing, their decisions are nonetheless
rational. They will look to maximise their preference function in conjunction with their
budget constraint.

Rationality is widely used in economic models to make a comparison between the average
rational person and another party. The concept is obviously important to economics but I
do not believe that it matters whether a person is rational or not. People's rationality is not
a constant, it varies hugely from pure rationality to an act that is not at all rational.
Rationality is so dependent on the situation presented to the decision-maker that it cannot
be seen as a constant measure. Reasonableness is again important in law but it also
changes according to the situation the decision-maker is presented with. I do not believe
that it matters whether people are rational or reasonable, everyone has a degree of
rationality but it varies from situation to situation. Both concepts are very important when
constructing models but are not important when they involve real people.

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References

Ulen, T S. (1999) 'Rational Choice Theory in Law and Economics' 0700 Fundamental
Concepts, pp. 790-818
Downloaded from: http://encyclo.findlaw.com/tablebib.html dated 13/11/2009

Macesich, G. (1997) 'The United States in the changing global economy: policy
implications and issues' Praeger Publishers

Connolly, M. (1959) 'The Categorical Imperative' Irish Quarterly Review, Vol 48(189),
pp 84-97

Sen, A. (2004) 'Rationality and Freedom' Oxford University Press

Matthew (22:39) The Bible: English Standard Version (1971)


Downloaded from: http://www.biblegateway.com/passage/?search=matthew
%2022:39&version=ESV#en-ESV-23909 dated 20/11/2009

Sen, A (1994) 'The Formulation of Rational Choice' The American Economic Review,
Vol 84(2), pp 385-390

Sen, A. (1997) 'Maximization and the Act of Choice' Econometrica, Vol. 65(4), pp 745-779

Binmore, K. (2005) 'Natural Justice' Oxford University Press

Llody, A. C. (1962) 'Natural Justice' The Philosophical Quarterly, Vol. 12(48), pp 218-227