Rational choice theory

Examples of Rational choice theory in the following topics:

• Observation: Framing the Problem

  • This experiment demonstrated the huge effect that framing can have on otherwise rational decision making.
  • This experiment demonstrated the huge effect that framing can have on otherwise rational decision making.
  • Their choices are influenced by their frames.
  • Amos Tversky and Daniel Kahneman have shown that framing can affect the outcome (i.e., the choices one makes) of choice problems, to the extent that several of the classic axioms of rational choice do not hold.
  • This led to the development of the prospect theory as an alternative to rational choice theory.

• Expectancy Theory

  • Expectancy Theory postulates that an individual's motivation can be derived through identifying an appropriate expectation.
  • The concept of choice is central to this theory, as there are a variety of behaviors that an individual could potentially choose.
  • To anticipate what choice will be made , identify what consequences would be expected as an outcome, and select the motivation which will result in the optimal outcome.
  • Expectancy Theory boils down to a few simple variables, which in conjunction produce the projected outcome based upon the motivational inputs.
  • Understand the three relationships and four variables that result in Expectancy Theory

• The Communist Economic System

  • A communist economic system is an economic system where, in theory, economic decisions are made by the community as a whole.
  • Communist theory was developed by a German philosopher in the 1800s named Karl Marx .
  • Labor is allocated according to state plans: in a command planning economy, there is no choice of profession; when a child is in school (from a very early age), a streaming system allocates people into designated industries.
  • This is often also called rationing.

• The Meaning of Price

  • That person is also willing to sacrifice choice for greater convenience.
  • Therefore, inconvenience, limited choice, and poor service are possible perceived costs.
  • There are two different ways to look at the role price plays in a society; rational man and irrational man.
  • The former is the primary assumption underlying economic theory, and suggests that the results of price manipulation are predictable.

• Psychological Pricing

  • Psychological pricing or price ending is a marketing practice based on the theory that certain prices have a psychological impact.
  • Psychological pricing or price ending is a marketing practice based on the theory that certain prices have a psychological impact.
  • The theory is that this drives demand greater than would be expected if consumers were perfectly rational.

• Frederick Taylor

  • Scientific management, also called Taylorism, is a theory of management that analyzed and synthesized workflows.
  • Although scientific management as a distinct theory or school of thought was obsolete by the 1930s, most of its themes are still important parts of industrial engineering and management today.
  • These include analysis; synthesis; logic; rationality; empiricism; work ethic; efficiency and elimination of waste; standardization of best practices; disdain for tradition preserved merely for its own sake or merely to protect the social status of particular workers with particular skill sets; the transformation of craft production into mass production; and knowledge transfer between workers and from workers into tools, processes, and documentation.
  • Scientific management, also called Taylorism, is a theory of management that analyzed and synthesized workflows.

• The Business Cycle

  • Sismondi's theory of periodic crises was developed into a theory of alternating cycles by Charles Dunoyer, and similar theories, showing signs of influence by Sismondi, were developed by Johann Karl Rodbertus.
  • Periodic crises in capitalism formed the basis of the theory of Karl Marx, who further claimed that these crises were increasing in severity and would lead to a Communist revolution.
  • In recent years, economic theory has moved towards the study of economic fluctuation rather than the study of business cycles.
  • Rational expectations theory leads to the efficient-market hypothesis, which states that no deterministic cycle can persist, because it would consistently create arbitrage opportunities.
  • Much economic theory also holds that the economy is usually at or close to equilibrium.

• Stakeholders: Consumers, Employees, and Shareholders

  • Whether it is a team, small group, or a large international entity, the ability for any organization to reason, act rationally, and respond ethically is paramount.
  • Leadership must have the ability to recognize the needs of its members (or called "stakeholders" in some theories or models), especially the very basics of a person's desire to belong and fit into the organization.
  • It is the stakeholder theory that implies that all stakeholders (or individuals) must be treated equally regardless of the fact that some people will obviously contribute more than others to an organization.

• Goal-Setting Theory

  • Choice: Goals direct efforts towards goal-relevant activities and away from distractions.
  • Goal-setting theory has limitations.

• Demand-Based Pricing

  • If done successfully, then in theory no customer will pay less for the product than the maximum they are willing to pay.
  • The theory is that this causes demand to be greater than it would be if consumers were perfectly rational.
  • Psychological pricing or price ending is a marketing practice based on the theory that certain prices have a psychological impact.
  • The theory is this drives demand greater than would be expected if consumers were perfectly rational.