Rational Choice Theory

Rational choice theory, also known as choice theory or rational action theory, is a framework for understanding and often formally modeling social and economic behavior. Rationality, interpreted as "wanting more rather than less of a good", is widely used as an assumption of the behavior of individuals in microeconomic models and analysis and appears in almost all economics textbook treatments of human decision-making. It is also central to some of modern political science, sociology, and philosophy. It attaches "wanting more" to instrumental rationality, which involves seeking the most cost-effective means to achieve a specific goal without reflecting on the worthiness of that goal. Gary Becker was an early proponent of applying rational actor models more widely. He won the 1992 Nobel Memorial Prize in Economic Sciences for his studies of discrimination, crime, and human capital.

The "rationality" described by rational choice theory is different from the colloquial and most philosophical use of the word. For most people, "rationality" means "sane," "in a thoughtful clear-headed manner," or knowing and doing what's healthy in the long term. Rational choice theory uses a specific and narrower definition of "rationality" simply to mean that an individual acts as if balancing costs against benefits to arrive at action that maximizes personal advantage. For example, this may involve kissing someone, cheating on a test, buying a new dress, or committing murder. In rational choice theory, all decisions, crazy or sane, are postulated as mimicking such a "rational" process. Thus rationality is seen as a property of patterns of choices, rather than of individual choices: there is nothing irrational in preferring fish to meat the first time, but there is something irrational in preferring fish to meat and preferring meat to fish, regularly.

The practitioners of strict rational choice theory never investigate the origins, nature, or validity of human motivations (why we want what we want) but instead restrict themselves to examining the expression of given and inexplicable wants in specific social or economic environments. That is, they do not examine the biological, psychological, and sociological roots that make people see the benefits encouraging them to kiss another, cheat on a test, use cocaine, or murder someone. Instead, all that is relevant are the costs of doing so—which for crimes, reflects the chance of being caught.

In rational choice theory, these costs are only extrinsic or external to the individual rather than being intrinsic or internal. That is, strict rational choice theory would not see a criminal's self-punishment by inner feelings of remorse, guilt, or shame as relevant to determining the costs of committing a crime. In general, rational choice theory does not address the role of an individual's sense of morals or ethics in decision-making. Thus, economics Nobelist Amartya Sen sees the model of people who follow rational choice model as "rational fools."

Because rational choice theory lacks understanding of consumer motivation, some economists restrict its use to understanding business behavior where goals are usually very clear. As Armen Alchian points out, competition in the market encourages businesses to maximize profits (in order to survive). Because that goal is significantly less vacuous than "maximizing utility" and the like, rational choice theory is apt.

Although models used in rational choice theory are diverse, all assume individuals choose the best action according to unchanging and stable preference functions and constraints facing them. Most models have additional assumptions. Those proponents of rational choice models associated with the Chicago school of economics do not claim that a model's assumptions are a full description of reality, only that good models can aid reasoning and provide help in formulating falsifiable hypothesis, whether intuitive or not. In this view, the only way to judge the success of hypothesis is empirical tests. To use an example from Milton Friedman, if a theory that says that the behavior of the leaves of a tree is explained by their rationality passes the empirical test, it is seen as successful.

However, it may not be possible to empirically test or falsify the rationality assumption, so that the theory leans heavily toward being a tautology (true by definition) since there is no effort to explain individual goals. Nonetheless, empirical tests can be conducted on some of the results derived from the models. In recent years the theoretical vision of rational choice theory has been subject to more and more doubt by the experimental results of behavioral economics. This criticism has encouraged many social scientists to utilize concepts of bounded rationality to replace the "absolute" rationality of rational choice theory: this points to the difficulties of data-processing and decision-making associated with many choices in economics, political science, and sociology. More economists these days are learning from other fields, such as psychology, in order to get a more accurate view of human decision-making than offered by rational choice theory. For example, the behavioral economist and experimental psychologist Daniel Kahneman won the Nobel Memorial Prize in Economic Sciences in 2002 for his work in this field.

Because of the relative success of economics at understanding markets, rational choice theory has also become increasingly employed in social sciences other than economics, such as sociology and political science in recent decades. It has had far-reaching impacts on the study of political science, especially in fields like the study of interest groups, elections, behaviour in legislatures, coalitions, and bureaucracy. Models that rely on rational choice theory often adopt methodological individualism, the assumption that social situations or collective behaviors are the result of individual actions alone, with no role for larger institutions. The poor fit between this and sociological conception of social situations partially explains the theory's limited use in sociology. Among other things, sociology's emphasis on the determination of individual tastes and perspectives by social institutions conflicts with rational choice theory's assumption that our tastes and perspectives are given and inexplicable.

Read more about Rational Choice Theory:  Actions, Assumptions, and Individual Preferences, Utility Maximization, Criticism, Benefits

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