Rational choice theory

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Definition

Loose definition

Rational choice theory is a key explanatory paradigm used in microeconomics to explain human behavior. The central claim is that most people, most of the time, exhibit instrumental rationality: they behave in ways that are designed to achieve the goals they seek to achieve, given their beliefs and the information available to them at the time.

Rational choice theory does not say that people consciously perform a cost-benefit analysis to determine the best course of action, but rather that they often behave as if they had performed such a cost-benefit analysis.

Presumption of rationality

A weak form of rational choice theory is a presumption of rationality:

  • Assume that people's behavior fits within the rational choice framework unless there is theoretical or empirical evidence to indicate otherwise.
  • In cases where people's behavior appears to be irrational, take seriously the possibility that they may have different goals from their stated goals, or that their actions may be achieving their desired goals in an indirect manner.
  • In cases where people's behavior still seems to be irrational, consider a framework such as bounded rationality or rational irrationality. Apply a rational choice framework, if possible, to explain the extent of deviation from rationality.