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Embedded rationality recognizes that what is rational depends on the social context in which you operate. For example, a friend saying, “You’re fired,” when you bring the wrong potato chips to a party, means something different than when your boss says it at work. Embedded rationality takes three forms: institutional, contextual (cultural), and situational.
Institutional Rationality
Within society, many spheres of activity exist, such as government, church, law, banking, healthcare, and so on. What individuals consider rational varies from one sphere of activity to another. Institutional rationality governs what is rational within a sphere of human activity.
Individuals may face multiple institutional rationalities as they go about their day. For example, someone may go from their work at a bank to a medical appointment at a doctor’s office during their lunch break. They then follow this by attending a meeting with the Parent-Teacher Association at their child’s school that evening.
The actions seen as ‘rational’ differ in each of these spheres. You may entrust your banker with tens-of-thousands of dollars, but not your doctor. You may share with your doctor deeply personal aspects of your body, but you would never share those details with your child’s teacher.
Each sphere determines what its desired ends are and the appropriate means to achieve those ends. An individual must adapt to each of these rationalities as they move from one sphere to the next to operate effectively.
Contextual (Cultural) Rationality
Contextual (cultural) rationality presumes that what is rational can only be determined from within the social context (that is, culture) in which it occurs. Members of a culture share values and beliefs. It is a community–what people hold in common.
Cultures exist across national and ethnic lines. They also exist within organizations, occupations, and neighbourhoods. Any collective of human activity will form a unique culture over time.
Through their shared values and beliefs, cultures become a means of coordinating activity. Members of a culture expect other members to act in certain ways and maintain specific attitudes. Thus, one can only determine what is rational from within a cultural framework.
Situational Rationality
Situational rationality occurs when we assign reasons to other people’s actions in an attempt to make those actions understandable. Generally, we believe that people will act rationally. Thus, whenever we witness a person doing something, we develop reasons that explain their action.
For example, we might see someone give another person money. We immediately start to think of reasons why.
Perhaps the first person is paying off a loan from the second. Maybe the first person recently bought something from the second and is now paying for it. Perhaps the second person is homeless, and the first is giving them money out of charity.
We assign a reason to other people’s actions that render those actions rational.