In contemporary society, the idea that people act in their self-interest is widely accepted.
Many popular TV shows and movies build their plots around this concept-that the characters will use whatever means necessary to get what they want.
For example, in the hit show Grease, the main character Danny Zuko wants to go to college and play football, but his girlfriend Sandy convinces him to stay in town and work at her father’s restaurant so that they can be together.
This action is in Sandy’s self-interest because she wants to stay with Danny, but it ends up hurting him in the long run when he realizes his true dream is not to work at a small town restaurant but instead on a football field as a coach.
This example could also apply to Sandy herself-perhaps she subconsciously did not want him to go to college and succeed because it would take away from her own success.
Definition of self-interest
The notion that people act rationally in their self-interest is an interpretive lens through which many economists view the world.
This concept is embedded in the many models used to describe and explain economic phenomena. For example, markets are hypothesized to settle into stable states called equilibriums where supply equals demand.
In this view, individuals make choices that maximize their benefit, which in turn contributes to a greater good as part of a larger market.
This lens can be useful when analyzing economics problems, but it can also be misleading. It assumes, for instance, that people always act independently and in accordance with this rational motivation of maximizing one’s gain.
It also overlooks other psychological factors such as emotions and morality that may influence an individual’s decisions.
Three examples of self-interest
In the world of business, self-interest drives executives to seek profits for their companies and pay rises and bonuses for themselves.
For consumers, self-interest motivates purchases that benefit the individual rather than the community or the environment.
When economists say that people act rationally in their self-interest, they mean that individuals consider the costs and benefits of their actions and choose those that lead to the greatest personal benefit.
They may not achieve benefits for society as a whole, but they don’t do things that don’t help them. And since it is impossible to prove what benefits someone considers important, this assumption about personal benefit is fair.
Examples of rational behavior
In everyday life, people view many behaviors as rational. People view working hard at school or work as rational, because you receive rewards in the form of higher pay or a better job.
People view spending money on things they need as rational, because the item may help them perform a task easier or better. They also view spending money on things they want as rational, because it may bring them satisfaction.
Economists look at these same actions differently. They divide all purchases into two categories: needs and wants. Needs are items that you must purchase in order to survive or fulfill a necessary task. Water, for example, is a need – you must purchase it in order to live.
A car is not a need – you could fulfill the necessary task of transportation by walking or using public transportation. Economists would look at the cost-benefit ratio of having a car and determine if the cost (money spent) is worth the benefit (time saved, improved quality of life).
Is everything we do purely rational?
By “rational,” economists don’t mean logically rational, as in “people act logically in their self-interest.” They mean
logical in their own personal-interest.
It’s easy to mistake this use of the word for the same one that applies to logical reasoning. But in fact, the two concepts are at odds with one another.
By “rational,” economists simply mean that people act to maximize some goal or objective, whether or not it aligns with our notions of what is good or worthwhile. They act in pursuit of some goal, and they choose the course of action that most likely achieves that goal. That’s all!
This can apply to very short-term goals (like eating a snack) or very long-term goals (like pursuing academic and professional success).
Consequences of being rational
The concept of rationality in individual behavior suggests that people act in their self-interest. People want what they perceive as benefits and want to avoid what they perceive as costs.
The benefits and costs that people seek or avoid are not always rational, however. A person may think that smoking is beneficial, even though most health professionals would disagree.
This is the key point: when economists use the word rational, they don’t mean completely logical. They simply mean acting in one’s self-interest.
But this can lead to some strange (and somewhat scary) situations. For example, a person may spend all of his/her money on expensive items, because he or she believes that having these items makes them happy. However, in the long run, this behavior will lead to negative consequences (such as financial distress).
Are there situations where it is not best to be rational?
Yes, there are many situations where it is not best to be rational. People often act irrationally due to
fears, emotions, and social pressures. In fact, some theorists argue that most of our actions are motivated by
emotions rather than rational thought.
When we are emotionally stressed or frightened, we may make poor decisions or decisions that go against our best interests. For example, some people stay in unhealthy relationships because they are afraid of being alone.
Businesses can also make irrational purchases or investments because of pressure from higher ups or because they want to appear successful. Both of these examples can end badly for the individuals making the decision and for others involved.
The key is to recognize when people around you are acting emotionally and aren’t listening to reason. Then, you can try to take steps to protect yourself and your interests.