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. The basic premise of rational choice theory is that aggregate social behavior results from the behavior of individual actors, each of whom is making their individual decisions. The theory also focuses on the determinants of the individual choices.
What is the 'Rational Choice Theory'
Rational choice theory is an economic principle that states that individuals always make prudent and logical decisions. These decisions provide people with the greatest benefit or satisfaction — given the choices available — and are also in their highest self-interest. Most mainstream academic assumptions and theories are based on rational choice theory.
Explaining 'Rational Choice Theory'
Rational choice theory assumes that all people try to actively maximize their advantage in any situation and therefore consistently try to minimize their losses. The theory is based on the idea that all humans base their decisions on rational calculations, act with rationality when choosing, and aim to increase either pleasure or profit. Rational choice theory also stipulates that all complex social phenomena are driven by individual human actions. Therefore, if an economist wants to explain social change or the actions of social institutions, he needs to look at the rational decisions of the individuals that make up the whole.
Arguments Against Rational Choice Theory
However, many economists do not believe in rational choice theory. Dissenters have pointed out that individuals do not always make rational utility-maximizing decisions. For example, the field of behavioral economics is based on the idea that individuals often make irrational decisions and explores why they do so.
An Example Against Rational Choice Theory
While rational choice theory is clean and easy to understand, it is often contradicted in the real world. For example, political factions that were in favor of the Brexit vote held on June 24, 2016, used promotional campaigns that were based on emotion rather than rational analysis. These campaigns led to the semi-shocking and unexpected result of the vote, when the United Kingdom officially decided to leave the European Union. The financial markets then responded in kind with shock, wildly increasing short-term volatility, as measured by the CBOE Volatility Index (VIX).
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Q&A About Rational Choice Theory
How does rationality apply outside of economics?
Rationality can be used as an assumption for the behaviour of individuals in a wide range of contexts outside of economics. It is also used in political science, sociology and philosophy.
What do self interest and invisible hand mean?
Self interest means that people act in their own best interests, while the invisible hand refers to how this action can benefit society as a whole.
Who are rational actors?
Rational actors are individuals who make decisions in their best interest.
How does behavioral economics differ from traditional microeconomics?
Traditional microeconomics assumes that all human beings are perfectly rational actors who will always act in ways that maximize their own utility (or profits), but behavioral economics recognizes that this assumption is unrealistic for several reasons."
What is rational choice theory?
Rational choice theory refers to a set of guidelines that help understand economic and social behaviour.
Why do many economists not believe in rational choice theory?
Many economists do not believe in rational choice theory because they have observed instances where individuals did not act rationally, such as when they made irrational decisions during Brexit vote.
Who do most mainstream academic assumptions and theories assume to be rational?
Most mainstream academic assumptions and theories assume that individuals are rational.
What does the theory postulate?
The theory postulates that an individual will perform a cost-benefit analysis to determine whether an option is right for them.
Why did the Brexit vote result shock financial markets so much?
Financial markets were shocked by the unexpected outcome of the Brexit vote because it went against what most investors had expected would happen based on previous polls showing a clear victory for remain camp."
What field of study explores why people often make irrational decisions?
Behavioral economics studies why people often make irrational decisions. The field of behavioral economics was born out of a need to explain why humans sometimes behave irrationally, despite being "rational" beings who should always seek to maximize their utility (or profit). Behavioral economics seeks to understand how emotions affect decision making, how biases can skew reasoning, how social norms affect individual behavior, and so on."
How did political factions use promotional campaigns during Brexit vote campaign?
Political factions used promotional campaigns during Brexit vote campaign based on emotion rather than reason which led