Rational Choice Theory

Last Updated :

21 Aug, 2024

Blog Author :

Prakhar Gajendrakar

Edited by :

Raisa Ali

Reviewed by :

Dheeraj Vaidya

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What Is Rational Choice Theory?

The rational choice theory states that people make decisions that benefit or align with their personal goals after logical analysis. In simple terms, whenever an individual is given choices, they are most likely to opt for a choice that will maximize their advantages.

Rational Choice Theory Definition

The theory is widely known for its everyday application. It plays a key role in individual decision-making and is formed after many psychological, economic, social, and cultural factors. The theory is also influenced by many factors that directly or indirectly impact human behavior and decision-making. Still, many scholars criticize it for its conformity with personal gain, capitalism, and greed.

  • Rational choice theory is related to human behavior. It explains the mindset of humans that make their decisions and choices by keeping their self-interest a priority.
  • The three significant elements of the theory are - rational actors, self-interest, and the invisible hand.
  • Adam Smith, the father of modern economics and a philosopher, is credited with developing the theory. He introduced the basic elements of the theory, like self-interest and the invisible hand.
  • The example supporting the theory can be picked from human life. For instance, choosing a product with a comparatively low price when two similar items of the same quality but different brands are provided.

Rational Choice Theory Explained

Rational choice theory refers to the school of thought that defines human behavior and how any individual is most likely to make decisions. It is sometimes called a choice theory or rational action theory. Its major applications occur in the context of microeconomics. In simple terms, theory explains how in most scenarios, when presented with choices or while making decisions, people are likely to make the best rational choice that fits their benefit or expands their possibilities of profit.

The theory reflecting decision-making helps academics and philosophers study people and society. The application of theory in various fields can communicate significant facts. For example, the application of rational choice theory in political science assumes that people act in their best interests for their benefit. The study of social life, social development, and the effects of human behavior will benefit from using rational choice theory in sociology. The rational choice theory in criminology explains the mindset of a criminal. 

Example

Let's look into a rational choice theory example for better understanding:

The rational choice technique can play a significant role in choosing an equity fund over a fixed income fund when investing if historical evidence suggests that stocks outperform safer investment options like fixed income funds. At the same time, stocks, options, and futures are examples of somewhat higher-risk products that a risk-averse trader will ignore. Instead, they prefer to remain with assets with low risk and fixed rates of return like Treasury bills and bonds.

How Rational Choice Theory Is Applied?

Adam Smith, the father of modern economics and a philosopher, is credited with developing the theory. The important elements associated with the implementation of the rational choice theory are:

Rational choice theory
  • Rational actors
  • Self-interest
  • Invisible hand

Whenever a rational choice theory is applied, these three are the driving force behind it. Rational actors make rational choices based on social, political, economic, cultural, and psychological factors influencing the decision-making process. The process ensures that the best rational choice happens with an inclination towards personal gain.

Self-interest is the second most crucial factor. Whenever confusing choices emerges, an individual will probably choose the course of action that fits their goal. Naturally, therefore, it explains the actions that favor obtaining personal benefits.

The last element is the invisible hand, a concept introduced by Adam Smith. It is the invisible market forces directing demand and supply to reach equilibrium. In other words, it moves the free market economy. It defines how people with a strong profit motive operate in a free market economy and ultimately contribute to the best interest of society.

Criticism

Some of the significant criticisms are as follows:

  • First, it only applies in a perfect world scenario. Therefore, no one can make the most rational choice in every situation.
  • It requires evidence and proof to arrive at a perfectly rational choice, which is not always accessible and available to people.
  • One criticism points to favoring individual choice and thinking process; therefore, the theory can only showcase individual behavior, not collective mindset.
  • It consists of various psychological, philosophical, social, cultural, and political views.
  • Opponents advocate that the assumptions considered while processing rational thought are not perfect.

Frequently Asked Questions (FAQs)

What is the rational choice theory definition?

The theory explains that individuals' decisions are based on their rational assessment, which aligns with their self-interest. Adam Smith, the father of modern economics, is the philosopher and economist behind the rational choice theory. He wrote an essay in 1776 titled "An Inquiry into the Nature and Causes of the Wealth of Nations," in which he mentioned how people tend to work towards their self-interests.

What are the strengths and weaknesses of rational choice theory?

The strengths are the following:
- Helpful in explaining the decision-making process of people
- Useful in segregating rational and irrational behavior
- Scope for critical thinking
- Removal of error margin
- Making the best decision possible

The weaknesses are the following:
- Time taking process
- Not viable for instant decision making
- Does not give much attention to the influence of instincts

How does the rational choice theory explain human behavior?

It explains that humans tend to target and work based on their self-interests. Therefore, whenever a situation demands comparing the cost and benefit of different projects, human behavior is most likely inclined towards choosing the one with the best possible outcome. It not only reflects human behavior but is one of the central ideas of almost every event occuring in fields like businesses and financial markets.

This has been a guide to What is Rational Choice Theory. We explain how to apply it in sociology, political science, & criminology, its example, & criticism. You can learn more about it from the following articles –