Rational choice theory

Examples of Rational choice theory in the following topics:

• Exchange

  • The theory is fundamentally oriented around rational choice theory, or the idea that all human behavior is guided by an individual's interpretation of what is in his best interest.
  • Social exchange theory is only comprehensible through the lens of rational choice theory.
  • Rational choice theory supposes that every individual evaluates his/her behavior by that behavior's worth, which is a function of rewards minus costs.
  • Second, humans are rational actors.
  • Explain how social exchange theory is based upon rational choice theory

• Problems with the Rational Decision-Making Model

  • Critics of the rational model argue that it makes unrealistic assumptions in order to simplify possible choices and predictions.
  • Critics of rational choice theory—or the rational model of decision-making—claim that this model makes unrealistic and over-simplified assumptions.
  • The more complex a decision, the greater the limits are to making completely rational choices.
  • Prospect theory reflects the empirical finding that, contrary to rational choice theory, people fear losses more than they value gains, so they weigh the probabilities of negative outcomes more heavily than their actual potential cost.
  • The theory of bounded rationality holds that an individual's rationality is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision.

• 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.

• Rational Decision Making

  • Rational decision making is a multi-step process for making choices between alternatives.
  • The word "rational" in this context does not mean sane or clear-headed as it does in the colloquial sense.
  • The rational model of decision making assumes that people will make choices that maximize benefits and minimize any costs.
  • The idea of rational choice is easy to see in economic theory.
  • An individual has full and perfect information on which to base a choice.

• Assumptions

  • People have rational preferences among outcomes that can be identified and associated with a value.
  • Later, the theory can be applied to more complex scenarios for additional study.
  • For example, economists assume that individuals are rational and maximize their utilities.
  • However, using the assumption that all people are rational enables economists study how people make choices.
  • Examples of such assumptions include perfect information, profit maximization, and rational choices.

• Theory of Utility

  • The theory of utility states that, all else equal, a rational person will always choose the option that has the highest utility.
  • The theory of utility is based on the assumption of that individuals are rational.
  • For example one person may prioritize flavor while another person may value making healthy choices more.
  • Based on their preferences, both made the economically rational choice.
  • If we could not assume rationality, it would be impossible to say what, when presented with a set of choices, an individual would select.

• Behavioral Economics: Irrational Actions

  • Behavioral economics focuses on the bounds of rationality of economic agents.
  • Behavioral game theory: analyzes interactive strategic decisions and behavior using the methods of game theory, experimental economics, and experimental psychology.
  • Market inefficiencies: include the study non-rational decision making and incorrect pricing.
  • The editing stage simplified risky situations using heuristics of choice.
  • This graph shows the three stages of rational decision making that was devised by Herbert Simon, a notable economist and scientist.

• Rationalism

  • This is commonly called continental rationalism, because it was predominant in the continental schools of Europe, whereas in Britain empiricism, or a theory that knowledge comes only or primarily from a sensory experience, dominated.
  • He wanted to put an end to an era of futile and speculative theories of human experience and regarded himself as ending and showing the way beyond the impasse between rationalists and empiricists.
  • Kant named his brand of epistemology (theory of knowledge) "transcendental idealism" and he first laid out these views in his famous work The Critique of Pure Reason.
  • Since the Enlightenment, rationalism in politics historically emphasized a "politics of reason" centered upon rational choice, utilitarianism, and secularism (later, relationship between rationalism and religion was ameliorated by the adoption of pluralistic rationalist methods practicable regardless of religious or irreligious ideology).
  • Define rationalism and its role in the ideas of the Enlightenment.

• The "McDonaldization" of Society

  • McDonaldization as described by Ritzer is a reconceptualization of rationalization, or moving from traditional to rational modes of thought, and scientific management.
  • In sociology, rationalization refers to the replacement of traditions, values, and emotions as motivators for behavior in society with rational, calculated ones.
  • Increase in volume does not equate to increase in choice.
  • George Ritzer is a sociologist who studies American patterns of consumption, globalization, metatheory, and modern and postmodern social theory.
  • McDonaldization is a reconceptualization of rationalization, or moving from traditional to rational modes of thought, and scientific management.

• Lifestyle

  • The Black Box Model is related to the Black Box Theory of Behaviorism, where the focus is set not on the processes inside a consumer, but the relation between the stimuli and the response of the consumer.
  • In this theory, the marketing stimuli (product, price, place and promotion) are planned and processed by companies, whereas the environmental stimuli are based on the economical, political, and cultural circumstances of a society.
  • The buyer's "black box" contains the buyer characteristics (e.g., attitudes, motivation, perception, lifestyle, personality, and knowledge) and the decision process (e.g., problem recognition, information research, alternative evaluation, purchase decision, and post-purchase behavior) which determine the buyer's response (e.g., product choice, brand choice, dealer choice, purchase timing, and purchase amount).
  • The Black Box Model considers the buyer's response as a result of a conscious, rational decision process, in which it is assumed that the buyer has recognized the problem.