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Law Economics Coursework-Are People Rational and Reasonable Final Version

Law Economics Coursework-Are People Rational and Reasonable Final Version

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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 selfcentred 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

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. but refuse to pick the last mango from the fruit basket.you may prefer mangoes to apples. despite refraining from taking the last mango due indirect factors. Menu dependence is the concept of choice being dependent on the set of available options or menu. h. By giving no weight to your own preferences. and yet be very pleased if someone else were to “force” that last mango on you……. Chooser dependence indicates that decisions will depend on who is choosing. Sen (2004) '.' The simple concept of rationality has many different direct and indirect factors that can affect the complexity of the decision that one faces.' Matthew 22:39 (1971) The Bible indicates that one should give equal weight to their own preferences and to those of others... This decision is rational. Sen (1997) 'if the set of available options is expanded …. 'You shall love your neighbour as yourself.. Sen (1997) '. pick t from the choice over {t. of which note has to be taken over and above the extent to which it enters what Frisch calls “my own total utility function.. but it can make you unreasonable in certain circumstances. For example. and yet turn the invitation down if the acquaintance. through a sense of commitment. 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..containing two mangoes and two apples...... 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. or respect for duty).. as you are wanting someone else to make the decision for you..”' 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.. from the larger set {t. the menu may have epistemic importance. that is. Sen's argument of chooser and menu dependence was that people are still rational even when considering other people's preferences. that is. not to his wife but to himself.Frisch's characterization of the problem is not one of maximization of a compound personality utility function that incorporates his altruism towards others. 0}.when our knowledge is limited. once decided on his wife's preferred choice he would choice the other cake.. Sen's example illustrates that one may .. Sen (1997) '……. This is the process of acting to allow another person to choose for you. his wife's second priority.' 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.. you may pick 0.Rather. which went against the traditional view of rationality. This concept is limited to a small group of people. or some heroin and cocaine (h)... as the anticipation of an improvement in their welfare through the decisions of others is self-interested and not at all reasonable. O}. this would generally apply to people you know well or family members.' In this case menu dependence can create an unreasonable judgement just by looking at the menu on offer.offers you a wider menu of either having tea with him. rejecting t.. 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. but it is also influenced by the perceptions of others... The welfare of people that you don't know particularly well or not at all would not feature very much in your decision-making. if invited to tea (t) by an acquaintance you might accept the invitation rather than going home (0).of the cakes would satisfy his wife's utility function.. the other person's wellbeing remains a separate concern.... 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. as you do not want to be perceived as only self-interested..

These judgements are based on assumptions about the person and a rejection of the wider menu. This concept does not extend to everyone but only to a finite number of people.. But as argued previously. A reasonable person will look to minimise the size of a negative externality that he or she may cause on another person.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. 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. Binmore (2005) '. this is an entirely rational act as one will anticipate gaining from this reputation in the future. Sen (1997) '(“reputation and indirect effects”) is most in harmony with the established conventions of standard neoclassical economics.. There are a number of indirect and direct factors that may affect their decisions. 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. For example the trapping of a burglar who breaks into your house would be seen as a negative externality to the burglar. 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. and the extract from Natural Justice by Binmore.. one might be reasonable to someone else by putting their preferences ahead of their own but will not necessarily be reasonable to themselves. Sen (1997) 'The person's well-being may be affected directly by the process of choice (for example. The indirect factors mentioned above would be far more prominent in the mind of a reasonable person as to a rational person. Reputation can be a contributing factor as one may not want to. Feelings towards others may also influence a decision-maker. A negative externality refers to the uncompensated adverse impact of one's actions on the well-being of another person. This process of reasoning is in line with wanting to be perceived by others as a considerate person. as one is considering another person's utility and placing it ahead of their own and by doing so increasing their own welfare. corroborates this as it indicates that you should give your neighbour's preferences equal weight. 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. would be entirely unreasonable. It can be argued that rationality and reasonableness are dependent on the situation that the decision-maker is presented with. Some people may see taking the last piece of cake and depriving others of the cake as immoral. for example friends or family members. it would be a smaller negative externality than if you trapped the burglar and then beat him to death. 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..judge the person offering drugs in a negative fashion just because of the change in menu.' The extract from the Bible shown earlier.' Other factors that affect the decision-making are that of social responsibility and morality. In most cases a reasonable person will look to create . for example take the last piece of cake. One measure of unreasonableness is whether an act can been seen as a loss to another party. instead of just the offer to drugs. The decision-maker's welfare will be taken into consideration as other people's perceptions can directly affect their welfare. 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. It does not require any basic departure from the ultimate concentration on culmination outcomes (and from rational choice guided only by self-interest).

The state of mind of a corporation would relate to a . many may well prefer that. In so far as choosing over the lives of others can be avoided. in this case profit. as the negative externality created is seen as just. In some cases a person can still create a negative externality and still be reasonable. it is seen as just as the burglar broke into the person's house. suppliers and the government. Using the example above a reasonable person. 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. is reasonable.a Pareto improvement. This was an entirely rational approach to business as they were looking to maximise their utility function. This begs the question whether a corporation can ever be reasonable. although causing the burglar a negative externality. 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. have corporations become reasonable rather than purely rational? Corporations have been required to consider other stakeholders. The question associated with corporations is. whereas a rational corporation would take the shareholders' preferences as the priority and the preferences of other stakeholders as carrying far less weight. This sheep behaviour of making the same choice as everyone else they will avoid any adverse perceptions. According to Kant the state of mind is critical when determining whether someone or.' According to the concept of natural justice the judge may not judge a situation which involves the judge itself. So far I have assumed that people are willing to make a decision given the factors presented to them in a particular situation. of course. 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. The traditional concept of a corporation was that the primary objective was to maximise the shareholder wealth. employees. 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. Many of the characteristics of rationality and reasonableness within people can be transferred to corporation reasoning.' In many scenarios people are influenced by the people around them. 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. Lloyd (1962) 'One of the circumstances under which a decision is reached and is often thought to make it validly or invalidly reached is. It can be particularly “heavy” when a person has to act on behalf of others in a fiduciary capacity. If a person makes the same decisions as others purely because of other's preferences they can been seen as opting out of rationality. whereby one's actions will bring about a change that benefits at least one person without anyone else being made worse off. the partiality or impartiality of the person making the decision. Sen (1997) 'The responsibility associated with the choice act can take many different forms. in this case something. Both the rightness of the decision and the impartiality of the judge can be called justice or fairness. It also requires the judge of the decision to be wholly impartial and not to be biased in any way towards the parties involved. such as the environment. although they still show a degree of reasoning.

the senior management who consider many factors in making their decisions. for example fashions of designer clothing. People's rationality is not a constant. When making decisions. 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. Corporate rationality is much more cut and dried as it is purely to maximise shareholders' wealth. cannot make a corporation reasonable. Although in a legal sense the corporation is a separate legal personality from it's managers. whereas corporate reasonableness is much more difficult to define. Kant's theory of moral duty combined with the concept of Pareto improvement is the best way to identify reasonableness. . As many theorists have argued one can make a broad range of different decisions and still be rational. it varies hugely from pure rationality to an act that is not at all rational. These decisions all carry a degree of rationality and in some cases carry nothing but rationality. to give a percentage of their profit to combat climate change. Although a corporation may not have a mind in itself. 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. whereas acting in a reasonable fashion is more constrained by many theories. can be seen as the mind of the corporation. Rationality is widely used in economic models to make a comparison between the average rational person and another party. often at all costs. Many concepts relating to people can be applied to corporations. If a decision is taken to increase their profits or improve their reputation then the decision is only rational. They will look to maximise their preference function in conjunction with their budget constraint. This biased viewpoint. 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. Consumer decisions are far more rational than social decisions. for example other people's preferences. their decisions are nonetheless rational. for example the maximisation of shareholders' wealth and employee welfare. where a reasonable act should be taken because it is morally right and not for any other reason. combined with pressure from shareholders to increase profit. The majority of people involve elements of rationality and reasonableness when making decisions in social context. People have the capacity to be both rational and reasonable. for example. Although one may take into account other factors in consumer decisions. but this decision may not be reasonable as the decision was purely based on improving the corporation's reputation and in turn increasing profit. I believe that acting rationally is a much more natural action. This relates to Kant's concept of moral duty.relevant person involved in the corporation. the vast majority of people will involve a wide range of factors in their analysis. The level of rationality is very much dependent on the factors they are presented with in a particular situation. The strong determinant of corporate reasonableness would be the state of mind of a relevant person within the corporation. In conclusion I believe that everyone has a degree of rationality within them. This is where one person's morally right actions will create a benefit for at least one other person without making anyone worse off. Once again this relates to the state of mind which is difficult to define when considering a corporation. a corporation can make a reasonable decision. The concept is obviously important to economics but I do not believe that it matters whether a person is rational or not. 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. in the context and rationality and reasonableness the state of mind should be based on the senior management. for example the chief executive.

Reasonableness is again important in law but it also changes according to the situation the decision-maker is presented with.Rationality is so dependent on the situation presented to the decision-maker that it cannot be seen as a constant measure. Word Count: 3476 words . 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.

(2004) 'Rationality and Freedom' Oxford University Press Matthew (22:39) The Bible: English Standard Version (1971) Downloaded from: http://www.html dated 13/11/2009 Macesich. (1997) 'Maximization and the Act of Choice' Econometrica.biblegateway. Vol 48(189).com/passage/?search=matthew %2022:39&version=ESV#en-ESV-23909 dated 20/11/2009 Sen. C. A. 12(48). M. Vol. (1959) 'The Categorical Imperative' Irish Quarterly Review. (2005) 'Natural Justice' Oxford University Press Llody. pp. G. pp 745-779 Binmore. (1962) 'Natural Justice' The Philosophical Quarterly. 790-818 Downloaded from: http://encyclo. A. A. Vol 84(2). pp 218-227 .findlaw. T S. (1997) 'The United States in the changing global economy: policy implications and issues' Praeger Publishers Connolly. A (1994) 'The Formulation of Rational Choice' The American Economic Review. pp 385-390 Sen. (1999) 'Rational Choice Theory in Law and Economics' 0700 Fundamental Concepts. K. Vol. pp 84-97 Sen. 65(4).com/tablebib.References Ulen.

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