Definition
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.
Rational Choice Theory
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).
Further Reading
- Sociological rational choice theory – www.annualreviews.org [PDF]
- On rational choice theory and the study of terrorism – www.tandfonline.com [PDF]
- A Behavioral Analysis of the Transformation from Rational Choice to Irrational Choice [J] – en.cnki.com.cn [PDF]
- Rational choice theory – link.springer.com [PDF]
