Reference no: EM133126157

One of the example I always give in my class regarding this issue is if I give you $1000 for a month (with no other source of income) and tell you that you have two options: A) You can spread your expenditure (like many does) on very important basic needs such as food, clothing, rent etc. for a month or B) Go to Las Vegas and spend the money in few minutes to starve for the rest of the month. Which one will you pick? While majority picks option A but I do have people, who do pick option B. Are they irrational? I had an uncle (died due to lung cancer in his late 60s, probably thanks to his heavy smoking & drinking habits) who loved to gamble at the cost of anything, would have always picked option B. Was he irrational? So, this is a good point to think what is rationality in Economics. Does it mean always making the right decision or something else?

If I give you $1000 for a month (with no other source of income) and tell you that you have two options:

A) You can spread your expenditure (like many does) on very important basic needs such as food, clothing, rent etc. for a month or B) Go to Las Vegas and spend the money in few minutes to starve for the rest of the month. Which one will you pick? While majority picks option A but as I said earlier, I do know people who do pick option B. Are they irrational? In economics, the answer is no, they are not necessarily irrational as long as they knew their choices and made a decision based on their knowledge which maximized their satisfaction.

Does this clarify what it means to be rational in economics?