Rational Choice Theory - Explained
What is Rational Choice Theory?
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What is Rational Choice Theory?
The rational choice theory refers to a school of thought that attempt to clarify conforming and well as a deviant phenomenon in a social setting. It is a framework for comprehending both social and economic behavior. This theory is of the assumption that the behavior that people portray, is as a result of individuals action, that is in line with their preferences (choices).
When it comes to rational choice theory, individuals act as they do simply because they trust that by carrying out actions of their choice, it becomes beneficial to them than the cost of the item. In other words, according to these individuals, people are fond of making choices that are irrational based on the goals they want to achieve. Their behavior is, therefore, governed by these actions.
Back to:ECONOMIC ANALYSIS & MONETARY POLICY
How is Rational Choice Theory Used?
When it comes to economics, rationality refers to one making choices that are efficient. These are choices that will bring about the greatest benefit to an individual. This means if there happen to be two choices, according to this theory, you will have to choose the most rewarding one. Rational theory, therefore, focuses on the assumption that individuals make decisions that are most rewarding and at the same time less costly. Also, you need to consider the term utility in the process of making decisions. The utility is a term in economics that refers to contentment one gets from something. In other words, it may mean how easier life becomes when we purchase something. An example of utility is for instance when you decide to use certain consumer items. One of the major considerations when making a choice or decision is its usability. This procedure is known as the utility of an item.
How Rational Choice Theory Works [Example]
Assuming that you want to make a list of groceries for the month, you will have to consider the sum of money that you are likely to spend to be able to accomplish your needs of eating. To achieve this, you will have to find out the most efficient ways of getting enough food for the month (maximizing reward). Generally, the rational choice theory explains how individuals decide to carry out an action. The action may start with checking out all of the available options. From there, you are at liberty to make your most preferred choice, of course, based on various factors. Some of the examples of these factors may include:
- The distance between the available grocery shops (how far one grocery is from each other).
- Which store in particular stocks your favorite groceries?
- Which store has affordable prices and made some good sales during the month
Rational Choice Theory Elements and Structure
The following elements apply to rational choice theory: The description of rational agents is based on their preferences that do not change over global outcomes that are conceivable. Rational agent probabilities outcomes are risky or uncertain, as inconsistencies are exhibited in their choices. The agents are believed to be rational under the following conditions:
- If the preference they have are complete
- If in their relationship, the rational agents reflect is superior, inferior of indifferent among all their set of choices.
- .If they are ordered in a logical manner where they do not exhibit any inconsistencies that are cyclic.
Note that the rational choice theory does hold that all of the considerations that relate to choices can be incorporated into the preference rankings of agents over all possible end states. Some of the considerations that may relate to an individuals choice(s) include:
- Attitudes toward risk
- A sense of fairness
Generally, researchers do infer from the previously observed behavior when they want to reestablish the preference believed to have control over the decision of the rational agents.
Limitation of the Rational Choice Theory
This theory has been seen to be selfish. This is because of its rationality, which asserts that individuals act out of self-interest, which is not the case on some occasions. Individuals in real sense are not self-centered, as they can sometimes choose to be unselfish (charitable) which is also likely to bring a feeling of self-satisfaction.
- Self Interest
- Cost-Benefit Analysis
- Enlightened Self-Interest
- Fisher's Separation Theorem
- Ratchet Effect
- Total Utility (Economics)
- Efficiency Principle
- Expected Utility
- Subjective Theory of Value
- Positional Goods
- Indifference Curve
- Time Preference Theory of Interest
- Marginal Benefit
- Diminishing Marginal Utility
- Sunk Costs
- Production Possibilities Frontier
- Law of Diminishing Returns
- Economic Efficiency
- Efficiency Theory
- Productive Efficiency
- Capacity Utilization Rate
- Allocative Efficiency
- Pareto Efficient
- Comparative Advantage
- Criticisms of the Economic Approach
- Behavioral Economics
- Normative Economics
- Positive Economics
- Invisible Hand
- Sunk cost