Lexicographic Preferences, Rationality and the Fallacies of Behavioral Economics

In this paper the differences between traditional economic theory and the relatively newer behavioral economic theory, which is a blend of economics and psychology, is discussed. The traditional assumptions regarding consumer preferences are explained and elaborated upon. This includes reflexivity, completeness, transitivity and continuity. Auxiliary assumptions, such as local nonsatiation and strict convexity, regarding preferences are also introduced. Lexicographic preferences in a two good world are explicated and demonstrated to encompass rational behavior even though they do not generate a well defined utility function. If a consumer has lexicographic preferences behavioral economists can be mistaken in thinking that consumer behavior is irrational.