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Rational Choice Theory: History & Theorists

Instructor: Emily Cummins
What motivates people's decision making? In this lesson, we'll talk about rational choice theory, which suggests that people are rational actors and will make the choice that maximizes benefit or reward while minimizing cost.

Rational Choice Theory

How do you approach making a decision? Do you always make the most rational choice? Do you always make the choice that is the most efficient or saves you the most time or money, for example? If so, you're probably what economists would call a rational actor. In this lesson, we'll talk about rational choice theory, which is a principle in economics that theorizes people will always try and make the most economic and efficient decision when given a choice between one or more things. Let's talk a little bit about what we mean by this.

Classical Theories

In economics, rationality means making the most efficient choice that will result in the greatest benefit to an individual. So, when you think about two different choices you have, which one will provide the most benefit to you? Which choice will give you the most reward? One of the major assumptions of rational choice theory is that people make the decision that maximizes reward while minimizing cost. When making a decision, we also take into account an idea in economics known as utility. Basically, utility is the satisfaction we get out of something. So, this could mean how much use we get out of something we buy or how much pleasure something brings us, or how much easier something makes our life. For example, if you're deciding on a consumer good, part of what you're likely to consider is how much you will use it. This is the utility of that item.

Let's take an example. Say you're planning out a grocery list for the week. You'll take into consideration the amount of money you will have to spend in order to fulfill your need to eat. You'll maximize the reward to you (having food to eat) by figuring out the most efficient way to get food for the week.

Rational choice theory is all about how people decide to do something. So, we start by looking at all of the options available to us. Then, we'll make the choice we most prefer, based on different factors. For example, some factors that influence your grocery shopping might be how far one grocery store is versus another, which store carries your favorite foods, or which store has better sales that week.

So where does rational choice theory come from? Much of the ideas can be traced back to the economist Adam Smith. Smith, who wrote in the 1700s, tried to make sense out of how people come to make choices, especially economic ones. Basically, Smith wanted to know how an economy can work when everyone is basically self-interested and making choices based on this self-interest. Smith argued in his famous treatise The Wealth of Nations that people ultimately act in their own self-interest but that they also take into consideration the wider society or greater good. So, it's not simply that we're all just selfish, even if we're making decisions based on our self-interest. We're calculating our best choice but we're also thinking about the larger social context, which brings us to a difference between sociology and economics.

Adam Smith first explored rational choice in the 1700s
Smith, economics, rational choice

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