Individuals with Constrained Rationality in Social Context and Their Ideal Behavioral Objectives: Beyond the Homo Economicus Paradigm

Abstract

The foundational assumptions of Western economics, centered on the "rational economic man" and the "maximization of behavioral goals," did not emerge in isolation but evolved from interpretations of Adam Smith’s "invisible hand" metaphor, later formalized through the rigorous hypothesis-deduction framework of neoclassical economics. This paper undertakes a critical reevaluation of these premises by tracing their intellectual lineage from the classical economics of the 18th and 19th centuries through the transformative Marginal Revolution of the late 19th century. We argue that behavioral economics’ concept of "bounded rationality" represents a fundamental challenge to neoclassical orthodoxy, as it acknowledges the dual rational-irrational nature of real-world "social actors"-individuals whose decisions are shaped by cognitive limits, emotional responses, and social contexts. Through a detailed analysis of the Allais Paradox, which exposes inconsistencies in expected utility theory, and empirical studies of altruistic behavior, we demonstrate that human objectives extend far beyond mere economic maximization, integrating non-economic utilities such as fairness, social recognition, and moral satisfaction. However, both neoclassical economics and behavioral economics remain constrained by their adherence to methodological individualism, a perspective that limits their ability to explain large-scale socio-structural phenomena such as inequality, institutional change, and class dynamics. To address this limitation, we propose a synthetic framework that integrates Marxian analyses of social relations and power structures with evolutionary institutionalism, offering a more holistic approach to economic anthropology-one that situates individual behavior within broader historical, social, and institutional contexts.