Questioning rationality: the case for risk consumption

Abstract

The standard assumption of rational, forward looking behavior has been heavily questioned given the impossibility of understanding some risk consumption behaviors within such a framework. The Becker and Murphy theory of rational addiction made a start on this debate fostering new refinements within the original rational theory framework as well as promising approaches based on the latest developments of cognitive science. This paper makes an overview confronting two main approaches highlighting their different time preferences assumptions. On the one hand the debate assumes rationality even in extreme situations of risk consumption - addictive behavior. On the other, new developments in the explanation of habits and addictive behaviours take an economic-psychological approach into consideration and have substantially different policy implications.