Rational choice theory

Rational choice theory

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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. It is the main theoretical paradigm
Paradigm
The word paradigm has been used in science to describe distinct concepts. It comes from Greek "παράδειγμα" , "pattern, example, sample" from the verb "παραδείκνυμι" , "exhibit, represent, expose" and that from "παρά" , "beside, beyond" + "δείκνυμι" , "to show, to point out".The original Greek...

 in the currently-dominant school of microeconomics
Microeconomics
Microeconomics is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. Typically, it applies to markets where goods or services are being bought and sold...

. Rationality (here equated with "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
Political science
Political Science is a social science discipline concerned with the study of the state, government and politics. Aristotle defined it as the study of the state. It deals extensively with the theory and practice of politics, and the analysis of political systems and political behavior...

 and is used by some scholars in other disciplines such as sociology
Sociology
Sociology is the study of society. It is a social science—a term with which it is sometimes synonymous—which uses various methods of empirical investigation and critical analysis to develop a body of knowledge about human social activity...

 and philosophy
Philosophy
Philosophy is the study of general and fundamental problems, such as those connected with existence, knowledge, values, reason, mind, and language. Philosophy is distinguished from other ways of addressing such problems by its critical, generally systematic approach and its reliance on rational...

. It is the same as instrumental rationality
Instrumental rationality
Two views of instrumental rationality can be discerned in modern philosophy: one view comes from social philosophy, sociology and critical theory, whereas another comes from natural philosophy.-The view from critical theory and social philosophy:...

, which involves seeking the most cost-effective means to achieve a specific goal without reflecting on the worthiness of that goal. Gary Becker
Gary Becker
Gary Stanley Becker is an American economist. He is a professor of economics, sociology at the University of Chicago and a professor at the Booth School of Business. He was awarded the Nobel Memorial Prize in Economic Sciences in 1992, and received the United States' Presidential Medal of Freedom...

 was an early proponent of applying rational actor models more widely. He won the 1992 Nobel Memorial Prize in Economic Sciences
Nobel Memorial Prize in Economic Sciences
The Nobel Memorial Prize in Economic Sciences, commonly referred to as the Nobel Prize in Economics, but officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel , is an award for outstanding contributions to the field of economics, generally regarded as one of the...

 for his studies of discrimination, crime, and human capital
Human capital
Human capitalis the stock of competencies, knowledge and personality attributes embodied in the ability to perform labor so as to produce economic value. It is the attributes gained by a worker through education and experience...

.

The "rationality" described by rational choice theory is different from the colloquial and most philosophical uses 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.

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
Motivation
Motivation is the driving force by which humans achieve their goals. Motivation is said to be intrinsic or extrinsic. The term is generally used for humans but it can also be used to describe the causes for animal behavior as well. This article refers to human motivation...

 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
Nobel Memorial Prize in Economic Sciences
The Nobel Memorial Prize in Economic Sciences, commonly referred to as the Nobel Prize in Economics, but officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel , is an award for outstanding contributions to the field of economics, generally regarded as one of the...

 Amartya Sen
Amartya Sen
Amartya Sen, CH is an Indian economist who was awarded the 1998 Nobel Prize in Economic Sciences for his contributions to welfare economics and social choice theory, and for his interest in the problems of society's poorest members...

 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
Armen Alchian
Armen Albert Alchian is an American economist and an emeritus professor of economics at the University of California, Los Angeles....

 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
Preference
-Definitions in different disciplines:The term “preferences” is used in a variety of related, but not identical, ways in the scientific literature. This makes it necessary to make explicit the sense in which the term is used in different social sciences....

 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 hypotheses, whether intuitive or not. In this view, the only way to judge the success of hypotheses is empirical tests. To use an example from Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...

, 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
Tautology
Tautology may refer to:*Tautology , using different words to say the same thing even if the repetition does not provide clarity. Tautology also means a series of self-reinforcing statements that cannot be disproved because the statements depend on the assumption that they are already...

 (true by definition) since there is no effort to explain individual goals. Nonetheless, empirical
Empirical
The word empirical denotes information gained by means of observation or experimentation. Empirical data are data produced by an experiment or observation....

 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
Bounded rationality
Bounded rationality is the idea that in decision making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision...

 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
Psychology
Psychology is the study of the mind and behavior. Its immediate goal is to understand individuals and groups by both establishing general principles and researching specific cases. For many, the ultimate goal of psychology is to benefit society...

, 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
Daniel Kahneman
Daniel Kahneman is an Israeli-American psychologist and Nobel laureate. He is notable for his work on the psychology of judgment and decision-making, behavioral economics and hedonic psychology....

 won the Nobel Memorial Prize in Economic Sciences
Nobel Memorial Prize in Economic Sciences
The Nobel Memorial Prize in Economic Sciences, commonly referred to as the Nobel Prize in Economics, but officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel , is an award for outstanding contributions to the field of economics, generally regarded as one of the...

 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
Social sciences
Social science is the field of study concerned with society. "Social science" is commonly used as an umbrella term to refer to a plurality of fields outside of the natural sciences usually exclusive of the administrative or managerial sciences...

 other than economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

, such as sociology
Sociology
Sociology is the study of society. It is a social science—a term with which it is sometimes synonymous—which uses various methods of empirical investigation and critical analysis to develop a body of knowledge about human social activity...

 and political science in recent decades. It has had far-reaching impacts on the study of political science
Political science
Political Science is a social science discipline concerned with the study of the state, government and politics. Aristotle defined it as the study of the state. It deals extensively with the theory and practice of politics, and the analysis of political systems and political behavior...

, especially in fields like the study of interest groups, elections, behaviour in legislatures, coalitions, and bureaucracy
Bureaucracy
A bureaucracy is an organization of non-elected officials of a governmental or organization who implement the rules, laws, and functions of their institution, and are occasionally characterized by officialism and red tape.-Weberian bureaucracy:...

. Models that rely on rational choice theory often adopt methodological individualism
Methodological individualism
Methodological individualism is the theory that social phenomena can only be accurately explained by showing how they result from the intentional states that motivate the individual actors. The idea has been used to criticize historicism, structural functionalism, and the roles of social class,...

, 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 conceptions of social situations partially explains the theory's limited use in sociology
Sociology
Sociology is the study of society. It is a social science—a term with which it is sometimes synonymous—which uses various methods of empirical investigation and critical analysis to develop a body of knowledge about human social activity...

. 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.

Actions, assumptions, and individual preferences


The basic idea of rational choice theory is that patterns of behavior in societies reflect the choices made by individuals as they try to maximize their benefits and minimize their costs. In other words, people make decisions about how they should act by comparing the costs and benefits of different courses of action. As a result, patterns of behavior will develop within the society that result from those choices.

The idea of rational choice, where people compare the costs and benefits of certain actions, is easy to see in economic theory. Since people want to get the most useful products at the lowest price, they will judge the benefits of a certain object (for example, how useful is it or how attractive is it) compared to similar objects. Then they will compare prices (or costs). In general, people will choose the object that provides the greatest reward at the lowest cost.
Rational decision making entails choosing an action given one's preferences, the actions one could take, and expectations about the outcomes of those actions. Actions are often expressed as a set, for example a set of j exhaustive and exclusive actions:
For example, if a person is to vote for either Roger or Sara or to abstain, their set of possible voting actions is:
Individuals can also have similar sets of possible outcomes.

Rational choice theory makes two assumptions about individuals' preferences for actions:
  • Completeness – all actions can be ranked in an order of preference (indifference between two or more is possible).
  • Transitivity
    Transitive relation
    In mathematics, a binary relation R over a set X is transitive if whenever an element a is related to an element b, and b is in turn related to an element c, then a is also related to c....

    – if action a1 is preferred to a2, and action a2 is preferred to a3, then a1 is preferred to a3.


Together these assumptions form the result that given a set of exhaustive and exclusive actions to choose from, an individual can rank them in terms of his preferences, and that his preferences are consistent.

An individual's preferences can also take forms:
  • Strict preference occurs when an individual prefers a1 to a2, but not a2 to a1.
  • In some models, a weak preference can be held in which an individual has a preference for at least aj, similar to the mathematical operator ≤.
  • Indifference occurs when an individual does not prefer a1 to a2, or a2 to a1.


In more complex models, other assumptions are often incorporated, such as the assumption of independence axiom. Also, with dynamic models that include decision-making over time
Time
Time is a part of the measuring system used to sequence events, to compare the durations of events and the intervals between them, and to quantify rates of change such as the motions of objects....

, time inconsistency may affect an individual's preferences.

Other assumptions


It is often claimed that rational choice theory makes some unrealistic assumptions in order to generate tractable and testable predictions. These can include:
  • An individual has full or perfect information
    Perfect information
    In game theory, perfect information describes the situation when a player has available the same information to determine all of the possible games as would be available at the end of the game....

     about exactly what will occur due to any choice made. More complex models rely on probability to describe outcomes.

  • An individual has the cognitive ability and time to weigh every choice against every other choice. Studies about the limitations of this assumption are included in theories of bounded rationality
    Bounded rationality
    Bounded rationality is the idea that in decision making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision...

    .


Even more realistic theories of human action include such components as Amos Tversky
Amos Tversky
Amos Nathan Tversky, was a cognitive and mathematical psychologist, a pioneer of cognitive science, a longtime collaborator of Daniel Kahneman, and a key figure in the discovery of systematic human cognitive bias and handling of risk. Much of his early work concerned the foundations of measurement...

 and Daniel Kahneman
Daniel Kahneman
Daniel Kahneman is an Israeli-American psychologist and Nobel laureate. He is notable for his work on the psychology of judgment and decision-making, behavioral economics and hedonic psychology....

's prospect theory
Prospect theory
Prospect theory is a theory that describes decisions between alternatives that involve risk i.e. where the probabilities of outcomes are known. The model is descriptive: it tries to model real-life choices, rather than optimal decisions.-Model:...

, which reflects the empirical finding as that, contrary to rational choice theory, individuals attach extra value to items that they already own compared to similar items owned by others. To rational choice theory, the amount that an individual is willing to pay for an item (such as a drinking mug) should equal the amount he or she is willing to be paid in order to part with it. In experiments, the former price is typically significantly higher than the latter. Behavioral economics has added a large number of other amendments to our picture of human behavior that go against pure economic rationality.

Utility maximization


Often preferences are described by their utility
Utility
In economics, utility is a measure of customer satisfaction, referring to the total satisfaction received by a consumer from consuming a good or service....

 function or payoff function. This is an ordinal number an individual assigns over the available actions, such as:
The individual's preferences are then expressed as the relation between these ordinal assignments. For example, if an individual prefers the candidate Sara over Roger over abstaining, their preferences would have the relation:

Criticism


Both the assumptions and the behavioral predictions of rational choice theory have sparked criticism from various camps. As mentioned above, some economists have developed models of bounded rationality
Bounded rationality
Bounded rationality is the idea that in decision making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision...

, which hope to be more psychologically
Psychology
Psychology is the study of the mind and behavior. Its immediate goal is to understand individuals and groups by both establishing general principles and researching specific cases. For many, the ultimate goal of psychology is to benefit society...

 plausible without completely abandoning the idea that reason
Reason
Reason is a term that refers to the capacity human beings have to make sense of things, to establish and verify facts, and to change or justify practices, institutions, and beliefs. It is closely associated with such characteristically human activities as philosophy, science, language, ...

 underlies decision-making processes. Other economists have developed more theories of human decision-making that allow for the roles of uncertainty
Uncertainty
Uncertainty is a term used in subtly different ways in a number of fields, including physics, philosophy, statistics, economics, finance, insurance, psychology, sociology, engineering, and information science...

, institutions, and determination of individual tastes by their socioeconomic environment (cf. Fernandez-Huerga, 2008).
Martin Hollis
Martin Hollis
Martin Hollis is a computer and video game designer and the founder and CEO of Zoonami. He has worked in the computer and video game industry for over 19 years and was Head of Software at Rare...

 and Edward J. Nell
Edward J. Nell
Edward J. Nell is an American economist and a professor at the New School for Social Research . Nell has been a member of the New School faculty since 1969, and has held the rank of Malcolm B...

's 1975 book offers both a philosophical critique of neo-Classical economics and an innovation in the field of economic methodology. Further they outlined an alternative vision to neo-Classicism based on a rationalist theory of knowledge. DON C. LAVOIE (1977, p. 325) argued that
To the devastating critiques of positivism by such philosophers as Brand Blanshard, W. V. Quine, S. Toulmin, A. R. Lousch and Karl Popper, can now be added that of Professors Hollis and Nell.lll The reason for the impotence of modern economics, these authors show, lies in its method. The rejuvenation of economics necessitates developing a different methodology, one which pays attention to the aspects of social sciences which distinguish them from natural sciences. We need a method which recognizes that people are not atoms and that society is not a laboratory.
Hollis and Nell (1975) dissect the textbook combination of neo-Classicism and Positivism, so crucial to the defence of orthodox economics against now-familiar objections. Within Neo-classicism, the authors addressed consumer behaviour (in the form of indifference curves and simple versions of revealed preference theory) and marginalist producer behaviour in both product and factor markets. Both are based on rational optimizing behaviour. They consider imperfect as well as perfect markets since neo-classical thinking embraces many market varieties and disposes of a whole system for their classification. However, the authors believe that the issues arising from basic maximizing models have extensive implications for econometric methodology (Hollis and Nell, 1975, p. 2). In particular it is this class of models – rational behavior as maximizing behaviour – which provide support for specification and identification. And this, they argue, is where the flaw is to be found. Hollis and Nell (1975) argued that Positivism (broadly conceived) has provided neo-Classicism with important support, which they then show to be unfounded. But we shall argue that they base their critique of neo-Classicism not only on their critique of Positivism but also on the alternative they propose, Rationalism. Indeed, they argue that rationality is central to neo-Classical economics – as rational choice – and that this conception of rationality is misused. Demands are made of it that it cannot fulfil.
In their 1994 work, Pathologies of Rational Choice Theory, Green and Shapiro argue that the empirical outputs of rational choice theory have been limited. They contend that much of the applicable literature, at least in Political Science, was done with weak statistical methods and that when corrected many of the empirical outcomes no longer hold. When taken in this perspective, Rational Choice Theory has provided very little to the overall understanding of political interaction - and is an amount certainly disproportionately weak relative to its appearance in the literature. Yet, they concede that cutting edge research, by scholars well-versed in the general scholarship of their fields (such as work on the U.S. Congress by Keith Krehbiel, Gary Cox
Gary Cox
Gary Cox is a Gaelic footballer from County Roscommon, Ireland. He first came to prominence with the Roscommon Junior team that won Connacht and All Ireland titles in 2000 along with future Senior stars like Karol Mannion and Shane Curran. The following year he was part of the Roscommon side that...

, and Mat McCubbins) has generated valuable scientific progress.
Duncan Foley (2003, p. 1) has also provided an important critic of the concept of Rationality and its role in Economics. He argued that
“Rationality” has played a central role in shaping and establishing the hegemony of contemporary mainstream economics. As the specific claims of robust neoclassicism fade into the history of economic thought, an orientation toward situating explanations of economic phenomena in relation to rationality has increasingly become the touchstone by which mainstream economists identify themselves and recognize each other. This is not so much a question of adherence to any particular conception of rationality, but of taking rationality of individual behavior as the unquestioned starting point of economic analysis.


Foley (2003, p. 9) went on to argue that
The concept of rationality, to use Hegelian language, represents the relations of modern capitalist society one-sidedly. The burden of rational-actor theory is the assertion that “naturally” constituted individuals facing existential conflicts over scarce resources would rationally impose on themselves the institutional structures of modern capitalist society, or something approximating them. But this way of looking at matters systematically neglects the ways in which modern capitalist society and its social relations in fact constitute the “rational”, calculating individual. The well-known limitations of rational-actor theory, its static quality, its logical antinomies, its vulnerability to arguments of infinite regress, its failure to develop a progressive concrete research program, can all be traced to this starting-point.

Schram and Caterino (2006) contains a fundamental methodological criticism of rational choice theory for promoting the view that the natural science model is the only appropriate methodology in social science and that political science should follow this model, with its emphasis on quantification and mathematization. Schram and Caterino argue instead for methodological pluralism. The same argument is made by William E. Connolly
William E. Connolly
William E. Connolly is a political theorist known for his work on democracy and pluralism. He is the Krieger-Eisenhower Professor of Political Science at Johns Hopkins University. His 1974 work The Terms of Political Discourse won the 1999 Benjamin Lippincott Award.-Biography:Connolly was raised in...

, who in his work Neuropolitics shows that advances in neuroscience further illuminate some of the problematic practices of rational choice theory.
More recently Edward J. Nell
Edward J. Nell
Edward J. Nell is an American economist and a professor at the New School for Social Research . Nell has been a member of the New School faculty since 1969, and has held the rank of Malcolm B...

 and Karim Errouaki (2011, Ch. 1) argued that:
The DNA of neo-Classical economics is defective. Neither the Inductive Problem, nor the problems of Methodological Individualism can be solved within the framework of neoclassical assumptions. The neo-Classical approach is to call on Rational Economic Man to solve both. Economic relationships that reflect Rational choice should be ‘projectible’. But that attributes a deductive power to ‘rational’ that it cannot have consistently with Positivist (or even Pragmatist) assumptions (which require deductions to be simply analytic). To make rational calculations projectible, the agents may be assumed to have idealized abilities, especially foresight; but then the Inductive Problem is out of reach because the agents of the world do not resemble those of the model. The agents of the model can be abstract, but they cannot be endowed with powers actual agents could not have. This also undermines Methodological Individualism; if behaviour cannot be reliably predicted on the basis of the ‘rational choices of agents’ a social order cannot reliably follow from the choices of agents.

Furthermore, Pierre Bourdieu
Pierre Bourdieu
Pierre Bourdieu was a French sociologist, anthropologist, and philosopher.Starting from the role of economic capital for social positioning, Bourdieu pioneered investigative frameworks and terminologies such as cultural, social, and symbolic capital, and the concepts of habitus, field or location,...

 fiercely opposed Rational Choice Theory
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. It is the main theoretical paradigm in the currently-dominant school of microeconomics...

 as grounded in a misunderstanding of how social agents operate. Bourdieu argued that social agents do not continuously calculate according to explicit rational and economic criteria. According to Bourdieu, social agents operate according to an implicit practical logic—a practical sense—and bodily dispositions. Social agents act according to their "feel for the game" (the "feel" being, roughly, habitus, and the "game" being the field).

Benefits


Describing the decisions made by individuals as rational and utility maximizing may seem to be a tautological explanation of their behavior that provides very little new information. While there may be many reasons for a rational choice theory approach, two are important for the social sciences. First, assuming humans make decisions in a rational, rather than a stochastic
Stochastic
Stochastic refers to systems whose behaviour is intrinsically non-deterministic. A stochastic process is one whose behavior is non-deterministic, in that a system's subsequent state is determined both by the process's predictable actions and by a random element. However, according to M. Kac and E...

 manner implies that their behavior can be modeled and thus predictions can be made about future actions. Second, the mathematical formality of rational choice theory models allows social scientists to derive results from their models that may have otherwise not been seen, and submit these theoretical results for empirical verification. Despite these benefits, there is nothing about rational choice theory that tells scholars that they should reject other methods of investigating questions about the economy and society, such as the sociological determination of individual tastes.

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