Which Psychological Theories Support or detach the Economic Perspective on Rational Behavior

With the help of literary research and experimentation, this paper concentrates itself on the difference between ‘Economic rationality’ and ‘Psychological Rationality’. Economics perceives rationality to be formed by models of cost-benefit behavior. If the benefits exceed the costs, the choice by a particular agent, is rational. Where traditional Economics interprets this to always be the case, Psychological theories also observe behavior to be irrational. This thesis will therefore look at Economic theories on, ‘bounded rationality and ‘herd behavior’, whilst also looking at Psychological theories on: ‘Conformity’, ‘Authority’, ‘Scarcity’, ‘Compliance’ and ‘Reciprocity’. The last will be tested in practice by a small experiment, from which the results are compared to a similar experiment done within the United States. This paper concludes with a discussion on the differences and trends with respect to rationality. The conclusion is comprises of the view, that individuals differ in what they perceive to be rational and most importantly, view their own behavior to be rational. Individuals, on the other hand, are able to see that the behavior of others is irrational. Thus, on the individual level, behavior is rational, whilst when we look at groups, behavior can be interpreted to be irrational.