Rational Behavior

Rational behavior is a personality trait demonstrated by individuals who make sensible choices based on reasoning. Such choices are well-considered and typically yield an optimized outcome compared to other options. This type of behavior is often referred to as "economic behavior."

In economic theory, it is a fundamental assumption that entities engage in rational thinking when making decisions. Rational behavior enables individuals to make optimal choices from a set of options, which may not always yield the best possible materialistic outcomes. Moreover, this type of decision-making aims to produce the highest quality benefits, whether financial or non-financial, for the decision-maker.

• Rational behavior in economics refers to the process by which individuals choose the most rational and desirable option among a set of choices.
• Economists assume that entities in economic theory make rational decisions. Rational behavior allows individuals to make optimal decisions, even if the outcomes are not always financially rewarding.
• Factors such as income, resources, and physical or intellectual abilities also constrain economic or rational decisions. 
• Emotional intelligence, lack of self-control, societal conventions, selflessness, resistance to change, and other factors may limit an individual's decision-making ability.

Rational behavior in economics implies the idea that an individual selects the most rational and desirable choice among the given options. In economics, rationality refers to a person's decision to take advantage of the opportunity set they see as having the most favorable possibilities given their preferences. Here, opportunities are characterized by considering all potential costs and advantages, particularly the costs of knowledge, decision-making, and transactions. Prospective opportunities are made up of perceived potential acts and perceived results. The economic theory works on the idea that the participants can make a desirable, reasonable choice.

According to the theory of rational behavior, economic or rational decisions are subject to certain limitations. This includes constraints on income, resources, or physical or intellectual capacities. In addition, the emotional quotient, lack of self-control, societal conventions, selflessness, resistance to change, and other factors may also limit an individual's decision-making ability.

Another factor that can influence choices, as per the theory of rational behavior, is "time". Furthermore, one of the most important factors in the rationality economic model is "knowledge or information". People involved, or elements of economic theory, evaluate their options using existing knowledge. The knowledge may be pre-existing or recently acquired.

The neoclassical approach typically assumes that the rational economic actors have "perfect information," which further leads to the assumption that rational action is behavior optimization. People might gather information until the perceived costs outweigh the perceived benefits. There is, however, no way to ensure that individuals will have the necessary knowledge to perform the "cost or benefit" analysis (i.e., to decide when to stop gathering information). Or that, once they stop gathering information, they will have the necessary knowledge to make an ideal or even a good decision.

Check out these examples to get a better idea:

Example #1

Daisy has two job offers, one from a multinational company in a big city that offers a handsome salary and another from a not so well known company with a decent amount of pay. She could choose the decent paying company that offers no scope for career growth and lead a relaxed life.

On the other hand, a big company comes with a huge salary, good exposure, good benefits, etc., but it comes with job stress. Since Daisy is from a poor background and needs money for survival, she keeps that as her priority; she chooses the job at the MNC.

Example #2

Dan goes shopping and sees the sign of buy two get one free offer on a laundry detergent. He is stocked for the month and doesn't need any. However, laundry detergents have a larger shelf life and need not be used immediately. His initial budget did not have room for the new offer. However, he decides to cut out the soft drink packs in the list to accommodate the detergent. According to rational behavior economics, this is a rational choice, as he saves money on the detergent and saves his health by not drinking sugary soft drinks.

This article has been a guide to what is Rational Behavior. Here, we explain the topic in detail with its examples and compare it with irrational behavior. You may also find some useful articles here -

• Rational Expectations
• Behavioral Economics
• Rational Choice Theory