Rational Choice Theory
Introduction of the theory of rational choices
The theory of rational choices forms a background to various political, economic, and social theories. It presumes that an individual makes a decision based on the analysis of information of presented objects and consequences of this decision. People want to obtain the benefits with lower costs and expenses. Rational theory is founded on the various assumptions, which are based on the supposals that an individual can compare all presented objects and choose one of them according to his or her personal preferences. An individual can make definite decision or an indefinite one. The theory is based on a supposal that a person has a comprehensive and accurate information about an object and about the consequences of his or her choice and, thus, takes a rational decision.
History of the theory of rational choice
Basic positions of rational choice theory were firstly mentioned by Thomas Hobbes in his work Leviathan in 1651. The main functions of any political institutions were explained by choice of an individual and by his or her personal perceptions. Then some characteristics of the theory were described in the works of David Hume, Adam Smith, Francis Hutcheson, and utilitarians, Jeremy Bentham and John Stuart Mill.
In the work Wealth of Nations (1776), Adam Smith paid much attention to personal interests and intends and social functionality of these characteristics. He stated, that It is not form benevolence of the butcher, the brewer, or the backer that we expect our dinner, but from their regard to their own interest.
However, the accurate formulation of rational theory was made by George Homas in 1961. He described a framework of the theory of exchange and assumptions based on behavioral psychology. Later, Blau, Coleman, and Cook created more formal model of rational choice theory. The scientists mentioned above applied mathematical methodologies to the theory.
In 1992, Grey Backer receives a Nobel Memorial Price in Economic Sciences for applying rational theory of choice in such specific fields as human capital, crime, and discrimination processes. The evolution of rational theory creates an understanding that not only market, but also social institutions and norms are resulted from personal choice.
Development of rational theory of choice has led to the creation of theory of games by Oskar Morgenstern and John von Neumann, and creation of various studies of demographic participation performed by Anthony Downs.
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Explanation of the theory
The theory of rational choice represents an understanding of persons behavior. It is based on rationality, or, wanting something more than less of something good. Rationality is understood in a way that some particular person performs his or her actions as if in the same time balancing expenses to perform activity that will maximize advantage from this action. Rationality is some kind of property of samples of various choices in more extend then of choices of some particular individual. For example, there is no any irrationality if somebody prefers apples instead of bananas; but some irrationality exists, when a person prefers apples instead of bananas and bananas instead of apples every time.
The rationality does not reflect background of some decision, i.e. its nature and validity. The rationality in application to the rational theory of choices describes psychological, biological, moral, and ethical grounds of actions. Therefore, the researchers do not search for reasons of actions. They observes particular decisions.
Usually, rational theory of choices is applicable for business investigation processes, because in business most of goals and aims are clear. For example, maximization of profit is rather clear and definite goal.
Often people make same choices in the similar situations, because of their particular preferences. Therefore, a lot of methodologies of theory of rational choices have additional assumptions. According to the theory, most individuals by performing particular choices or actions, try to maximize their profit and minimize their expenses. So, people have some preliminary information about profit that they could obtain, and the expenses, which they would have to bear. They use this information for comparing various outcomes of their choices and actions. People make these choices in numerous situations. In this way they form their social behavior.
Theory of rational choice is widely implemented in the different economic researches. People compare costs of various products and benefits, which they could obtain after buying some particular product. So, they are most likely to choose a product that will provide highest benefits on the lowest prices.
This theory explains the reasons of making decisions in the various spheres of peoples lives. Usually people are seeking for the most cost-effective means for achieving a special aim without making this aim worse.
The theory has three assumptions of preferences. Without these assumptions, the theory of rational choices is not applicable. The first one is completeness, i.e. all products are ordered due to persons preference to these products. So, two, three, or more products can be compared. The second assumption is that comparison of all presented products is possible, i.e. all the products can be compared between each other. The third assumption is described as absence of dependence between irrelevant alternatives. So, a person has an ability to analyze information about all products, compare all the products, and choose one of them based on some background.
There are different kinds of preferences. The first one is uncertainty or indifference, when a person cannot prefer one object over another. The second preference is weak choice, when a person makes a decision with an assumption at least. The third possible preference is more accurate and strict. It takes place, when a person makes a choice on one of given objects without any doubts. Sometimes the researchers make some unreal assumptions in order to make some obedient forecasts and models, which could easily be tested. For example, when person has comprehensive and accurate data about all the subjects and consequences of his or her choice.
On the basis of the rational theory of choices, it can be stated that person makes decisions on the basis of his or her personal aims and wishes. However, it is impossible to obtain everything that person wants, so he or she is obliged to make choice among the products available. The person analyses possible outcomes of performed actions and makes a decision. So, person believes that particular set of actions is more rational than the other one.
An individual, as well as his or her choice and actions were described by the scientists in the rational theory of choice. This theory finds its reflection in various economic, political, and social studies. Comparison and consequences of this theory are widely used in various sciences, such as sociology, anthropology, psychology, and political science. Rational theory of choice is very popular in various scientific spheres, because a person makes choices in all spheres of life.
According to the theory, all persons choices and actions are rational and all pro and cons of action are measured before making a decision. The theory presumes interaction between people, and the way this interaction influences the choice and consequences of the choice. Various factors, both reactants and non-reactants, lead to individuals preference. Among these factors are varieties and value-oriented activities, emotions, traditions, and habits.
Various scientific methodologies were based on the theory of rational choice. Among them are price theory, econometrics, and theory of games. Theory of games represents an order or some kind of directions and consequences of choices and preferences of some (more than one) individuals, whose benefits are determined by their joint choices and decisions. There are different forms of representation of this theory. Two-by-two game is some kind of theory of games, where two individuals have two personal strategies. The pure conflict type of the theory of games is when benefit of one person leads to loss or disadvantage of the other person. The pure coordination type of theory of games is when two individuals obtain the maximum benefits only when they act in the same direction and make coordinated decisions. Moreover, there are a lot of different types of mixed games .
The theory of rational choices has some disadvantages. People sometimes make irrational choices, which cannot be explained by the theory, because it is based on the presumption that a person always makes rational decision. Therefore, some kind of conflict between the theory and reality exists. In addition, according to Herbert Simon, Nobel laureate, people do not always have a comprehensive and accurate information about subjects, actions, and their consequences. So, they cannot always make rational choice and take rational decision.
Richard Thaler proposed an idea, according to which people do not always make rational decisions due to their different attitudes to the obtained benefits. For example, a person can drive to another shop for saving $10 on a $50 purchase, but most probably, they will not drive to another shop for saving $10 on a $1000 purchase. So, the amount of obtained benefit compared to the total value of a subject is also very important in making a decision.
Green and Sharpio in their scientific work Pathologies of Rational Choice Theory state that the theory of rational choices was based on the researches held on a limited group of individuals, whose opinions, choices, and decisions cannot be considered as opinions, choices, and decisions of all people. These researchers stated that mathematical methodologies applied in the theory cannot be applied to the real life situations.
Pierre Bourdieu states that people do not always analyze subjects and situations and calculate all possible consequences of their choices and decisions. Usually people act according to a practical sense and their inherent feelings.
However, the theory of choices has a lot of benefits. The theory makes it possible to determine and to analyze peoples choices, actions, and preferences. Most of people in most situations make rational decisions and perform rational actions. Stochastic decisions are taken randomly. Therefore, rational theory of choice provides the most accurate understanding of peoples decisions. Additionally, the theory of rational choices is used in various mathematic models. So, researches have an ability to analyze and built forecast that could not be created by other means except mathematical.
The rational theory of choices is rather young approach in the scientific world. There are still many things to investigate in peoples behaviors and reasons of their choices. However, the theory creates an understanding of actions and decisions. This understanding has a strong background and can be applicable to most of the situations in the real life. The theory itself became a background of various scientific researchers in political, economic, and social spheres.
Some critics state that not all of the decisions are rational and sometimes people do not have a comprehensive vision of the situation and consequences of choices. However, such situations are usually random. In the most cases, the theory of rational choices is applicable to the real life.