Minds and Machines 25 (4):339-360 (2015)

Kevin Vallier
Bowling Green State University
Many economic theorists hold that social institutions can lead otherwise irrational agents to approximate the predictions of traditional rational choice theory. But there is little consensus on how institutions do so. I defend an economic internalist account of the institution-actor relationship by explaining economic rationality as a feature of individuals whose decision-making is aided by institutional structures. This approach, known as the subjective transaction costs theory, represents apparently irrational behavior as a rational response to high subjective transaction costs of thinking and deciding. The theory has two attractive features. First, it reconciles rational choice theory with the increasing body of evidence cataloguing putative errors in economic decision-making. Second, it vindicates the explanatory power of individual choice against externalist challenges; the subjective transaction costs theory keeps economic rationality in the head.
Keywords Economic rationality  Economic agency  Market rationality  Subjective transaction costs  Behavioral economics  Heuristics and biases  Extended mind
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DOI 10.1007/s11023-015-9386-6
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The Foundations of Statistics.Leonard J. Savage - 1954 - Wiley Publications in Statistics.
Essays in Positive Economics.Milton Friedman - 1953 - University of Chicago Press.

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