Rational Choice Theory

The rational choice theory states that people make decisions that benefit or align with their personal goals after logical analysis. In simple terms, whenever an individual is given choices, they are most likely to opt for a choice that will maximize their advantages.

The theory is widely known for its everyday application. It plays a key role in individual decision-making and is formed after many psychological, economic, social, and cultural factors. The theory is also influenced by many factors that directly or indirectly impact human behavior and decision-making. Still, many scholars criticize it for its conformity with personal gain, capitalism, and greed.

• Rational choice theory is related to human behavior. It explains the mindset of humans that make their decisions and choices by keeping their self-interest a priority.
• The three significant elements of the theory are - rational actors, self-interest, and the invisible hand.
• Adam Smith, the father of modern economics and a philosopher, is credited with developing the theory. He introduced the basic elements of the theory, like self-interest and the invisible hand.
• The example supporting the theory can be picked from human life. For instance, choosing a product with a comparatively low price when two similar items of the same quality but different brands are provided.

Rational choice theory refers to the school of thought that defines human behavior and how any individual is most likely to make decisions. It is sometimes called a choice theory or rational action theory. Its major applications occur in the context of microeconomics. In simple terms, theory explains how in most scenarios, when presented with choices or while making decisions, people are likely to make the best rational choice that fits their benefit or expands their possibilities of profit.

The theory reflecting decision-making helps academics and philosophers study people and society. The application of theory in various fields can communicate significant facts. For example, the application of rational choice theory in political science assumes that people act in their best interests for their benefit. The study of social life, social development, and the effects of human behavior will benefit from using rational choice theory in sociology. The rational choice theory in criminology explains the mindset of a criminal. 

Let's look into a rational choice theory example for better understanding:

The rational choice technique can play a significant role in choosing an equity fund over a fixed income fund when investing if historical evidence suggests that stocks outperform safer investment options like fixed income funds. At the same time, stocks, options, and futures are examples of somewhat higher-risk products that a risk-averse trader will ignore. Instead, they prefer to remain with assets with low risk and fixed rates of return like Treasury bills and bonds.

Adam Smith, the father of modern economics and a philosopher, is credited with developing the theory. The important elements associated with the implementation of the rational choice theory are:

• Rational actors
• Self-interest
• Invisible hand

Whenever a rational choice theory is applied, these three are the driving force behind it. Rational actors make rational choices based on social, political, economic, cultural, and psychological factors influencing the decision-making process. The process ensures that the best rational choice happens with an inclination towards personal gain.

Self-interest is the second most crucial factor. Whenever confusing choices emerges, an individual will probably choose the course of action that fits their goal. Naturally, therefore, it explains the actions that favor obtaining personal benefits.

The last element is the invisible hand, a concept introduced by Adam Smith. It is the invisible market forces directing demand and supply to reach equilibrium. In other words, it moves the free market economy. It defines how people with a strong profit motive operate in a free market economy and ultimately contribute to the best interest of society.

Some of the significant criticisms are as follows:

• First, it only applies in a perfect world scenario. Therefore, no one can make the most rational choice in every situation.
• It requires evidence and proof to arrive at a perfectly rational choice, which is not always accessible and available to people.
• One criticism points to favoring individual choice and thinking process; therefore, the theory can only showcase individual behavior, not collective mindset.
• It consists of various psychological, philosophical, social, cultural, and political views.
• Opponents advocate that the assumptions considered while processing rational thought are not perfect.

This has been a guide to What is Rational Choice Theory. We explain how to apply it in sociology, political science, & criminology, its example, & criticism. You can learn more about it from the following articles – 

• Decision Theory
• Investment Decision
• Behavioral Economics