Cognitive dissonance and utility maximization

Abstract

Neoclassical theory of utility maximization assumes irrational behavior to be unsystematic and therefore impossible to model. Recent advances in behavioral decision theory suggests irrationality may be systematic. In line with these and earlier findings from the theory of cognitive dissonance, a simple descriptive model of utility maximization is developed with the added feature of an information filter. The model is then used to explain a few 'irrational' micro and macro behaviors.