Neoclassical economics models humans as rational utility-maximizers with consistent preferences. Behavioral economists have documented extensive deviations from this model—loss aversion, hyperbolic discounting, framing effects. Defenders argue the rational model remains a useful simplifying assumption for market-level predictions, even if individual psychology is more complex. Critics counter that market-level predictions often fail precisely because they ignore systematic irrationalities that don't cancel out.
Based on the passage, it can be inferred that
behavioral economics has had no influence on economic theory
all human behavior conforms to rational utility maximization
neoclassical economics makes no simplifying assumptions
debates about theoretical models may involve weighing simplification benefits against predictive limitations
Correct Answer: D
Choice D is the best answer. Simplification trades accuracy for tractability.
- Context clues: Defenders value simplification for predictions; critics note predictions "often fail" due to simplification.
- Meaning: Models involve trade-offs between simplicity and accuracy.
- Verify: The back-and-forth about whether simplification is justified shows the trade-off structure.
💡 Strategy: When defenders and critics debate whether simplification is worth its costs, infer a trade-off evaluation.
Choice A is incorrect because behavioral economics has documented "extensive deviations." Choice B is incorrect because behavioral economists document many deviations. Choice C is incorrect because the rational model is called a "simplifying assumption."