These various schools of thought are models; like any scientific model, they are necessarily incomplete and imperfect. Each will tend to work pretty well in certain domains and not others.
There's no one right answer. When you find the right answer, keep it to yourself, and enjoy your billions.
Of course many people will apply layers of partisanship over these models, and defend them or advance them for partisan reasons, and that will tend to complicate things too.
Also, a note about rationality - it's a term of art that means something different in economics than it does in regular speech. One is rational if one choses the thing they prefer, even if they are being foolish, inconsistent, or illogical. If I want that third donut, it's rational to eat it, even if I'll regret eating it two minutes later. All that matters is that, at the moment of choice, I preferred it to my other available options.
What is irrational is deciding that something is my preferred choice, and then not choosing it. That kind of irrationality is extremely rare in real life, and would undermine any economic theory.
Thanks for the reply mate.
I agree on grounding your definition of reality to the time that the action took place. That makes a lot of sense.
But I disagree on your definition of "rationality", maybe you could clear this up for me:
First, many people don't choose their preferred choice, the most obvious reason being price. I would prefer to have X product, but it's too expensive, so I'll settle for Y instead.
Really, I thought rationality was defined as a fair/consistent price. IE, people will pay the market rate for that donut, but they won't spend $10,000 on each one.
My base assumption would be that people want the highest quality, or perceived quality, at the lowest price. But they're also lazy, so there's a sweet-spot regarding effort/time invested in searching/bargaining for such a product, and buying the thing or not. For example, if I was a poor uni student, I would (and did) spend a lot of my time searching for the best cheap computer that was in my budget. Whereas when you're well off, it wouldn't be worth your time to search for such a thing, and you'll just go into a store and pay retail price for whatever fits your fancy.
In this case, irrationality would be buying or selling at a rate that is vastly different from the market rate. For example, if stock X is trading for $100/share, buying at $1,000/share, or selling at $10/share is irrational. Yes, the price can change wildly if it's crashing or booming, but even then, if trades are being made at $100/share, then selling at $99.99 or even $99.90 will work, so there's no reason to sell so cheap.
What do you think about my hypothesis? Does it make sense?
This seems to be a very common discussion point, even among professional economists.
As you pointed out, there are many things that factor into the _cost_ of good, including the price. The _cost_ is the total of what you forsake to have the good - including your time, effort, risk, annoyance, attention, and so on.
IMO, the only logically consistent way to look at this is to start from the observation that every choice means forsaking some other option (which always includes doing nothing). Therefore, cost of any choice is the value, to you at that moment, of the next-best option, which was forsaken.
Rationality simply means executing your preferred choice. That's all it has to mean. All the confusion vanishes once you accept this definition.
This approach clarifies a lot of common errors. If I prefer a nice TV to the cheap one, but it costs too much, then my preferred _choice_ is the cheap TV, even if my preferred _TV_ was the expensive one. My choice takes everything else that I regard as significant into account.
Here's an old exam question that really nails the point home:
You are hungry, and you have five dollars in your pocket. There is exactly one place to get food, which offers a tuna sandwich for $3.50 and a ham sandwich for $4.50. You would rather buy either of these sandwiches than go hungry.
What is the _cost_ of the ham sandwich?
"$4.50" is incorrect. That is the _price_.
"A tuna sandwich and $1.00" is the correct answer.
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