Rational Choice Theory: What It Is in Economics, With Examples

Origin and Premises

Rational Choice Theory states that people use rational calculations to make rational choices and achieve outcomes that are aligned with their own, personal objectives.

Everyone makes choices by first considering the costs, risks, and benefits of making certain choices. Choices that seem irrational to one person can make sense to another based on the individual’s desire, as these choices are based on personal preferences.

At its core, rational choice theory assumes that people are in control of their own decisions. Rational choice theory can be helpful in understanding the behavior of individuals and groups and can help to determine why people, groups, and society move toward certain choices based on specific costs and rewards.

Rational choice theory conflicts with some other theories in sociology. For example, the psychodynamic theory states that people seek gratification due to unconscious properties.

Meanwhile, rational choice theory holds that there is always a rational justification for behaviors, and people try to maximize rewards because they are worth the cost.

Self-Interest and the Invisible Hand

The ideas behind rational choice theory are said to originate in Philosopher and economist Adam Smith’s essay, An Inquiry into the Nature and Causes of the Wealth of Nations (Smith, 1776).

In short, this essay proposed that human nature has a tendency toward self-interest, and this self-interest resulted in prosperity through the control of the so-called “invisible hand” — the collective actions of the self-interested human race.

Adam Smith’s ideas about the invisible hand were inspired by the work of Thomas Hobbes in “Leviathan” (1651), who stated that political institutions function as a result of individual choices.

Further Iterations

Although rational choice theory stemmed from neoclassical economists such as Smith, the theory moved into the social sciences in the 1950s and 1960s when George C. Homans, Peter Blau, and James Coleman related rational choice theory to social exchange.

Appropriating its economic origins, these social theorists stated that social behavior is driven by a rational calculation of costs and rewards.

Homan’s (1958) essay on social behavior as exchange, for example, argued that social interactions and small group processes could be explained by principles from microeconomic theory.

Meanwhile, Blau’s (1964) book on social exchange theory uses rational choice to describe the interactions between those in a bureaucracy (Oberschall, 1979).

Lastly, Harsanyi related ideas from game theory to social systems, particularly social exchange situations.
Coleman (1964) created another branch of social exchange theory.

Coleman modeled social behavior mathematically as rational action and saw systems of collective decisions as like economic markets.

Characteristics

There are multiple rational choice theories, and the benefits that people are said to receive from their choices vary from one rational choice theory to the next.

Sometimes, rational choice theories say that individuals seek money or re-election, and others contend that the ends that people pursue are not necessarily self-serving in nature (Becker, 1976; Downs, 1957; Olson, 1965; Schelling, 1960; Green and Fox, 2007).

Nonetheless, rational choice theories make a few assumptions:

At its core, Rational Choice Theory is a system of axioms that give a basis for predicting how individuals will make decisions. These axioms say that decisions happen between pairs of alternatives and that these alternative choices are consistent, transitive, independent, continuous, and monotonic.

By consistency, rational choice theorists demand that it is possible for a decision maker to rank all of their options according to how desirable they are. This is also called the assumption of connectedness. Preferences must be either equal or unequal, and unequal preferences can be ordered for comparison across the decision maker’s whole list of preferences.

Transitivity, meanwhile, is the assumption that if choice A is preferred to choice B, and choice B is preferred to choice C, then consistency requires that choice A be preferred to choice C (Green and Shapiro, 1994).

The distance between preferences or the magnitude of preferences does not need to be known to the person analyzing this ranking of choices.

Independence assumes that all preferences are completely independent of other preferences.

For example, the preferability of choice A does not depend on the preferability of choices B or C. Moreover, continuity assumes that preferences hold across time and space. Given the same conditions, the decision-maker will still prefer choice A in, say, a decade if they preferred it today.

Lastly, rational choice theorists assume monotonicity. This means that all decision rules and preferences are the same across individuals and times.

This assumption is in place because allowing for the assumption that there will be major variations in individual preferences dependent on individual characteristics creates major mathematical problems (Storm, 1990).

Rational Choice vs. Organizational Theories

Rational Choice Theory and Organizational Theory are two different but closely related theories.

Economic theorists use Rational Choice Theory as a means of aggregation. In essence, this means that Rational Choice Theory is useful when there is a need to link how individuals change their actions to how the characteristics of organizational change.

However, economic theorists tend to take a broad view where organizational context, organizational structure, and individual actions interact to change organizational functioning.

In this view, there is no assumption that the sum of individuals’ choices explains organizational behavior. Indeed, many organizational theories do away with individual actions altogether, preferring to examine the relationships between and among organizational and contextual characteristics.

Rational choice theory is premised on the assumption that people will carry out actions to maximize utility. Meanwhile, Organizational theory is based on the premise that organizations tend to be organized in a rational way, so as to make the means to completing ends efficiently.

A school of thought known as Organizational economic theory links Rational Choice Theory and Organizational Theory.

Advantages and Disadvantages

Rational choice theory has been tested severely on an empirical level (Quah and Sales, year).

Rational choice theory assumes that a good sociological theory is one that interprets any social phenomenon as the culmination of rational, individual actions.

This assumption allows sociological theories to cut out vague forces — such as, say, cognitive bias or evolution — as the cause of human behavior.

Although this grants rational choice theory a great deal of power, scholars such as Boudon (2003) have criticized it in describing many social phenomena.

This combination of success and failure in rational choice theory has created polarization in the social sciences community (Hoffman, 2000).

For instance, consider what Boudon (2003) calls the voting paradox. According to rational choice theory, the effect of a single vote on turnout for any election is so small that rational actors should always refrain from voting, as the costs of voting are always higher than the benefits.

Yet, millions of people vote in national elections each year.

Scholars have proposed many solutions to this voting paradox. One explanation is that people would feel strong regret if their ballot would have made a difference in an election’s outcome despite knowing that the probability of this event occurring is infinitesimally small (Frejohn and Fiorina, 1974).

Another explanation states that, by not voting, people run the risk of losing their reputation (Overbye, 1995). Boudon (2003) argues that all of these explanations do not eliminate the paradox of voting.

Psychologists have also devised a number of experiments, such as the “ultimatum game,” that resist rational choice theory (Wilson, 1993; Hoffman and Spitzer, 1985).

In the ultimatum game, there are two players. One player must decide how much money he and the other get from a shared pool, and the other can decide to accept or reject the offer.

If the second player accepts, everyone gets the amount offered; if he rejects, nobody gets the money. In the frame of rational choice theory, a rational first player would always try to offer as little as possible to the second player, and a rational second player would always accept.

However, studies have shown that second players rarely accept when offered less than about a third of the pool; in fact, a number of offering players split the money evenly.

On the other hand, people can frequently take actions where the benefit to the actor is zero or even negative. C.W. Mills (1951) identified what he called the “overreaction paradox.”

Mills studied female clerks working in a firm where they sat in a large room doing the same tasks at the same kind of desk in the same work environment. Frequently, conflicts broke out over minor issues, such as being seated closer to a heat or light source.

These paradoxes, Boudon argues, can be interpreted satisfactorily by either irrationality or rational choice theory — and these are just a few of the numerous observations that psychologists, sociologists, and economists have made where the theory fails.

Boudon (2003) offers three types of phenomena that tend to fall outside of rational choice theory’s explanatory jurisdiction.

The first of these involves a phenomenon where people base their choices on beliefs that are not commonplace.

For instance, someone may refuse to go to the doctor’s office because they believe that the doctor will harm them.

Rational choice theory is also ineffective when faced with phenomena characterized by normative common-place beliefs that do not have an effect on consequence (Boudon, 2001).

A citizen may strongly disapprove of corruption even if they are not affected by it.

Finally, Boudon argues that rational choice theory is ineffective when considering behavior by individuals for whom it cannot be assumed their behavior is dictated by self-interest.

For example, members of an audience may side fiercely with one character while watching a play despite the fact that the events of the play are of no consequence whatsoever to them. This can also happen in real-world situations.

For example, people can have strong opinions on issues such as capital punishment despite never having been implicated in the death penalty nor knowing anyone who has (Boudon, 2003).

There have also been strong advocates favoring rational choice theory, such as Riker (1995).

Riker criticizes experiments showing evidence against rational choice theory, claiming that most of the tests involve cases where there are no real stakes for participants that would necessitate careful calculation (for example, a lack of experiments where participants have been required to put up their own money for bets).

Additionally, Riker argues that the “naive” participants of rational choice theory experiments are not reflective of, say, highly-trained policymakers in political and economic voting.

Examples

• Criminology: Rational choice theory sees criminal behavior as the outcome of decisions and choices made by an offender. Cornish and Clarke (1987) use the theory as a framework for understanding crime control policies. According to Cornish and Clarke, individuals who commit crimes choose between criminal and non-criminal alternatives when seeking to achieve their goals.
• For example, someone who is drunk may choose to drive (criminal behavior), call a taxi, use public transportation, walk, or persuade a sober friend to drive them home. Usually, rational choice theory posits that non-criminal alternatives tend to be considered before criminal ones are, as criminal alternatives tend to come at a greater cost.
• Cornish and Clarke use “choice structures” to categorize crimes into different categories under rational choice theory. These choice structures represent the various factors that an individual must weigh when deciding whether or not to commit a crime.
• For example, factors that actors may consider when committing theft involving cash may involve the severity of punishment, the likely cash yield per crime, the planning necessary, and whether or not there is an identifiable victim.
• Meanwhile, someone deciding whether or not to use a substance illegally may take into account the extent to which it interferes with everyday tasks, the length and intensity of the “high” from the drug, and the method through which the drug is administered (1987).
• The researchers argue that a rational choice perspective on crime can suggest lines of inquiry that account for stability and change and criminal behavior and that people will generally choose to commit the crimes that provide the lowest cost-to-benefit ratio.
• In this view, strategies that attempt to attack the “root” cause of crime should focus on the difficulty of committing crimes over using non-criminal means (Cornish and Clarke, 1987).
• Political Sociology: Rational choice theory has been used extensively in political science. One advocate of the theory was William H. Riker.
• In his article, “The Political Psychology of Rational Choice Theory,” Riker (1995) presents a model of expected utility — a mathematical approximation of how much benefit people ought to derive from a situation — in considering why people vote.
• Countering the criticisms of people such as Boudon (2003), Riker accounts for factors unrelated to the outcome of an election pertinent to voting — such as pride in citizenship and satisfaction in taking sides (Riker, 1995).

References

Becker, G. S. 1976. The Economic Approach to Human Behaviour. Chicago: University of
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Blau, P. M. (1964). Social exchange theory. Retrieved September, 3(2007), 62.

Boudon R. 2001b. Sociology. International Encyclopedia of the Social and Behavioral Sciences. Amsterdam: Elsevier

Boudon, R. (2003). Beyond rational choice theory. Annual review of sociology, 29(1), 1-21.

Coleman, J. S. (1964). Introduction to mathematical sociology. Introduction to mathematical sociology.

Cornish, D. B., & Clarke, R. V. (1987). Understanding crime displacement: An application of rational choice theory. Criminology, 25(4), 933-948.

Downs, A. 1957. An Economic Theory of Democracy. New York: Harper and Brothers.

Ferejohn, J. A., & Fiorina, M. P. (1974). The paradox of not voting: A decision theoretic analysis. American political science review, 68(2), 525-536.

Green, D. P., & Fox, J. (2007). Rational choice theory. Social Science Methodology. L.: Sage Publications, 269-281.

Green, D., & Shapiro, I. (1994). Pathologies of rational choice theory: A critique of applications in political science. Yale University Press.

Hobbes, T (1651/1939). Leviathan. New York: Modern Library

Hoffman, E., & Spitzer, M. L. (1985). Entitlements, rights, and fairness: An experimental examination of subjects” concepts of distributive justice. The Journal of Legal Studies, 14(2), 259-297.

Homans, G. C. (1958). Social behavior as exchange. American journal of sociology, 63(6), 597-606.

Mills CW. 1951. White Collar. The American Middle Classes. New York: Oxford Univ.Press

Oberschall, A. (1979). 13. SOCIAL EXCHANGE AND CHOICE. Qualitative and Quantitative Social Research: Papers in Honor of Paul F. Lazarsfeld, 158.

Olson, M. (1965). The logic of collective action: Public goods and the theory of groups. Cambridge, MA: Harvard University Press

Overbye, E. (1995). Making a case for the rational, self‐regarding, ‘ethical’ voter… and solving the ‘Paradox of not voting’ in the process.

European Journal of Political Research, 27(3), 369-396.

Riker, W. H. (1995). The political psychology of rational choice theory. Political Psychology, 23-44.

Schelling, T. C. (1960). The Strategy of Conflict, 15. Auflage, Cambridge, MA.

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Wilson JQ. 1993. The Moral Sense. New York: Free Press