Situation Analysis:

• A girl went to the mall to buy school shoes. Upon

entering the shoes section, a pair of ragged shoes
caught her attention. The girl was having a hard time
choosing between school shoes or ragged shoes.
• Guide Question:
• 1. What was the situation all the about?
• 2. If you are in the same situation, what will you
choose?
Rational choice
theory
• Rational choice theory also called as
rational action theory or choice theory, states
that individuals use rational calculations to
make rational choices and achieve outcomes
that are aligned with their own personal
objectives. These results are also associated
with an individual’s best, self-interest. Using
rational choice theory, it is estimated that the
outcomes provide people with the greatest
benefit and satisfaction given the choices
they have available.
• It is used to model human decision making,
especially in the context of Microeconomics,
where it helps Economists better understand
the behavior of a society in terms of
individual actions as explained through
rationality, in which choices are consistent
because they are made according to one’s
personal preferences. For Economists,
rationality simply means that when you make
a choice, you will choose the thing you like
best.
• Rational choice theory is a theory in social
science that argues with human behavior, and
social life in general, that can be explained in
terms of rational choices of individuals. The
‘rationality’ defined by the rational choice
theory adopts a more specific and narrower
definition, which simply means that “an
individual acts as if balancing costs against
benefits to arrive at action that maximizes
personal advantage” (Friedman, 1953).
• Rational Choice Theory is an approach that
could be used by social scientists to understand
human behavior, because this theory explains
that human action and behavior are products of
choice. Individuals rationalize their situations by
processing between the most beneficial choice
and the lesser individual cost. In this theory, cost
–benefit analysis is always performed in every
given situation and is considered an instinctual
response to every human. Cost is something
disadvantageous to or what is lost by an
individual, while benefit is what should be
gained or advantageous to the individual after
making the choice.
Here are some questions
commonly asked during cost –
benefit analysis:
• - Will this benefit me?
• - How will this benefit me?
• - How far I’m going to negotiate?
• - What will I have to sacrifice?
• - How much will it cost?
 EXAMPLE:
• Sebastian has two classmates whom he wants to be friends with: Ethan, a social
outcast but has the newest action game, and Alyster, the most popular in the
class but does not like to play action games. Sebastian’s first level of cost –
benefit analysis is choosing between having the chance to play the newest
game or not. His second level of cost-benefit analysis is choosing whether he
would like to be associated with social outcast or with the most popular student
in class. The rational choice for Sebastian would then be dependent on which is
more important to him- to play the game or to be associated with the popular
crowd. This example provides the basic principle of rational choice theory
wherein preferences play an important role in decision-making, while the
individual rationalizes the burdens and benefits of his/her individual choices.
The key elements of all rational choice
• Preferences denote the positive or negative evaluations
individuals attach to the possible outcomes of their
actions.
• Beliefs refer to perceived cause-effect relations, including
the perceived likelihood with which an individual’s
actions will result in different possible outcomes.
• Constraints define the limits to the set of feasible actions.
ASSUMPTIONS OF THE RATIONAL CHOICE THEORY
According to Peter Abell
1. Individualism – it is the individuals
who ultimately take actions. Individuals,
as actors in the society and everywhere
the go, behave and act always as rational
beings, self-calculating, self-interested
and self-maximizing. These individual
social actions are the ultimate source of
larger social outcomes.
 ASSUMPTIONS OF THE RATIONAL CHOICE THEORY
According to Peter Abell (2000
2. Optimality – Individuals choose their actions
optimally, given their individual preferences as well as
the opportunities or constraints with which they are
faced with. Abell (2000) defines optimality as taking
place when no other course of social action would be
preferred by the individual over the course of action the
individual has chosen. This does not mean that the
course of action that the actor adopts is the best in terms
of some objective, and outside judgment. The rational
choice theory, therefore assumes, according to Abell
(2000), that individuals “do the best they can, given
their circumstances as they see them”.
 ASSUMPTIONS OF THE RATIONAL CHOICE THEORY
According to Peter Abell
3. Structures - Abell argues that structures and norms that dictate a single course of
action are merely special cases of rational choice theory. In other words, the range of
choices in other circumstances differ from choices in a strong structural
circumstance, where there may be only one choice. Although these structures may be
damaging to the rational choice model, individuals will often find a way to exercise
action optimally, hence the rational choice model may not necessarily show harmony,
consensus, or equality in courses of action. Again, structures, as we know them, may
not be optimal from the viewpoint of an individual with few resources, however, the
rational choice approach will attempt to explain how this situation emerges and is
maintained through rational choices.
 ASSUMPTIONS OF THE RATIONAL CHOICE THEORY
According to Peter Abell (2000
4. Self-Regarding Interest – This assumption states that the actions of
the individual are concerned entirely with his or her own welfare. Abell
(2000) noted that in as much as this is a key assumption in the rational
choice approach, is not as essential to the approach as the assumption on
optimality.
 ASSUMPTIONS OF THE RATIONAL CHOICE THEORY
According to Peter Abell (2000
5. Rationality – This appears to be the most predominant assumption
of the rational choice theory. All individuals, according to this
assumption, act in ways that would benefit them more; every
individual is most likely to undertake courses of actions that they
perceive to be the best possible option and one that would immensely
be to their own advantage.
 Key Concepts in Rational Choice Theory
Social consequences of Scarcity-based
Decision
Human beings have unlimited wants but only
limited resources. Scarcity of resources and the
requirements of human’s unending ambitions
force us to make a choice. The most essential
rational choice is to conserve the limited
resources and share these with each other.
However, in every choice we make, opportunity
cost exist.
 Key Concepts in Rational Choice Theory
Social consequences of Scarcity-based Decision
The decision to make such choices depends upon
our mind-set, especially those individuals who
only seek self-interest and what benefits them
most. Such structure of human nature being
described in the context of rational choice theory
and further elaborates on the tragedy of the
commons.
Important Theorist
William Stanley Jevons (1835–1882) was an
English economist who applied the principles of
rational choice theory in political economy. Jevons
was one of the first to advance the theory of
marginal utility(value), which sought application
in determining and understanding consumer’s
behavior.
 Important Theorist
This theory states that the utility (value) of something
decreases as more of it is consumed. The theory held
that the utility (value) of each additional unit of a
commodity—the marginal utility—is less and less to
the consumer. When you are thirsty, for example, you
get great utility from a glass of water. Once your thirst
is quenched, the second and third glasses are less and
less appealing. Feeling waterlogged, you will
eventually refuse water altogether. “Value,” said
Jevons, “depends entirely upon utility.”
 Important Theorist
Jevons also identified the concept called “equation
of exchange,” which shows that for a consumer to
be maximizing his or her utility, the ratio of the
marginal utility of each item consumed to its price
must be equal. Marginal utility, in this sense, points
to the line wherein the value for certain object is
still within satisfactory level
 Important Theorist
Gary Becker (1930–2014) was an American economist
who expanded the study of economics to the realm of
sociology and other social sciences. Suggesting that
human behavior is subject to economic analysis, Becker
argued that individuals act to minimize their own
welfare, thereby taking the scope of economics beyond
mere calculation of financial gains. Like other theorist of
rational choice theory, Becker ascribes to the principle
that humans behave according to their “perceived values
and preferences”.
 Important Theorist
For Becker, it is detrimental to choose preferences outside
the necessary skills and talents required to complete the
task. He said that if the purpose of human behavior is the
maximization of welfare, then discrimination in a
corporate setting leads to an opposite effect. Becker, added
that preferences are also to be chosen based on rational
decisions. Thus, a “True Rational Choice” is having a
clear understanding not only of the situation and the given
choices, but also of the factors that are imposed by the
individual actors in decision making.
Criticisms and Limitations
Rational choice theory is heavily criticized
for its neglect of ethical and moral standards.
The main philosophy of rational choice theory
is the acquisition of personal interest, power
and wealth. It is not strict with the method
and the product of decision-making: rather, it
analyses the outcome and the preferences
based on what is optimal and ultimately
beneficial for individual actor.
 Let’s try answering some questions
1. What are the basic assumptions of rational
choice theory?
2. How does scarcity affect decision making?
 Let’s try answering some questions
3. How does Becker define a “true rational
choice”?
4. Why is rational choice theory heavily
criticized?
5. Why is it important to apply cost-benefit
analysis in decision- making?
 Let’s try answering some questions
- How does preferences affect decision
making?
- Why is it important to scrutinize your desire
first, before making a decision?
What did you learn today?