Introduction to Rational Choice Theory

By Charlotte Ruhl, published Jan 22, 2022 | Fact Checked by Saul Mcleod, PhD


Take-home Messages

  • Rational choice theory was first put forward by economist and philosopher Adam Smith and helps inform human decision making.
  • The theory states that when determining our economic and social behavior we undergo a cost-benefit analysis to arrive at the action that will bring about our greatest personal benefit, which often benefits society as a whole.
  • This model can be applied to a wide range of situations, from economic and political, to social and personal ones.
  • Although rational choice theory deepens our understanding of human behavior, it certainly does not come without its critiques. Most notably, many scholars argue that humans do not actually act entirely rationally when making decisions, and sometimes we don’t act rationally at all, making rational choice theory have limited practical application.
Consider the following scenario: you realize you’ve just ran out of your favorite food and must go to the grocery store to replenish your stock. You have two options for getting to the store: you can either walk or drive.

Driving takes 15 minutes but uses a quarter of a gallon of gas. Walking takes much longer – 45 minutes – but burns no fossil fuels and is a source of exercise. After weighing the costs and benefits of both options, you decide that walking is the better option.

Humans are constantly making decisions similar to this. And while we might not always do such an explicit calculation of the costs and benefits, we are often subconsciously weighing pros and cons before taking a specific course of action.

You may have heard of the cost-benefit analysis – a common economic and psychological phenomenon that refers to a systematic approach to evaluating the strengths and weaknesses of alternatives in order to determine the most optimal approach.

The cost-benefit analysis is the core foundation of rational choice theory, which states that every choice we as humans make is completed by first considering the costs and benefits of each course of action.

So, when deciding the best mode of transportation to arrive at the grocery store, you computed the costs and benefits of both alternatives in order to rationally arrive at the best option.

Rational choice theory is one of the most foundational theories to behavioral economics – it explains how humans make decisions – both big and small – every single day. Understanding the key assumptions and applications of this theory allows us to better understand humans and why we act the way we do.


History

In 1776, Adam Smith, a Scottish economist and philosopher, published his famous essay, An Inquiry into the Nature and Causes of the Wealth of Nations.

This essay introduced his concept of the invisible hand – the unseen forces that drive the free market economy (Smith, 1791). According to this theory, humans are driven by self-interest and rationality, and so they will make decisions that will positively benefit the entire economy.

In other words, when humans undergo rational choice theory to make decisions, they act in certain ways that (although often invisibly) benefit the economy as a whole (Smith, 1791).

Adam Smith, founder of the Rational Choice Theory Fast forward a couple centuries to the 1950s when sociologists George C. Homans, Peter Blau, and James Coleman advocated for rational social theory in the context of social exchange (think friendships or any mutual relationship between two people).

These scholars argued that making calculations about benefits and costs of decisions drives social behavior, explaining why people initiate individual or group relationships and also why they end them (“Introduction to rational choice theory in Social Work,” 2020).

The contemporary rational choice theory operates on a set of assumptions that need to be satisfied.

Theoretical Assumptions

To better explain rational choice theory, it is important to understand these five key assumptions that underlie this concept (Green, 2022).

  1. All actions are rational and result from closely considering the costs and benefits of all courses of action.
  2. In order for a certain action to be completed, the benefits of one action must outweigh the costs.
  3. When evaluating such benefits and costs, the individual has perfect information about each alternative in order to come to a rational conclusion.
  4. People will continue to pursue their chosen course of action (ex: a relationship with a friend) so long as the benefits continue to outweigh the costs.
  5. To optimize all benefits, individuals will use all available resources.

It’s important to distinguish between decisions that have multiple alternative choices and ones that don’t. In other words, I might be deciding whether to go to sleep (where the options are yes or no) or which shoes to buy (where the alternatives are theoretically endless).

When considering whether to take one specific action, you simply have to evaluate the costs and benefits of this singular action. However, it becomes more complicated when there are multiple from which to choose.

In this situation, the costs and benefits of all alternatives need to be evaluated and compared against each other in order to decide the best course of action.

In the case of alternatives, rational choice theory has two technical assumptions:

  1. For any two alternatives, either the individual prefers one over the other, or they are indifferent. In other words, any two alternatives can be compared against each other.
  2. If alternative x is preferred over alternative y, and alternative y is preferred over alternative z, then we can safely conclude that alternative x is preferred over alternative z.

It is important to note that these assumptions are not an accurate representation of reality (for example, we often don’t have perfect information about each alternative).

Rather, rational choice theory is merely a model, or a simplified description of reality (like a map of the subway system), that helps to formulate hypotheses about human behavior and better understand why we act the way we do (Friedman, 1953).

Rational Choice Theory in the Real World

You probably already have a sense that rational choice theory is everywhere. But let’s focus on a few different domains to really understand just how prevalent it is in our daily lives.

Crime

Ron Clarke (1980) assumes that individuals have free will and the power of reason, therefore criminals have made a choice to commit a crime.

Clarke argues that if the perceived cost of committing the crime is outweighed by the benefit, people will be more likely to offend. Right realists believe that the current costs of crime are too low which is why the crime rate has increased.

Further Reading: Rational Choice Theory of Criminology.

Economics

Rational choice theory plays a major role in describing our economic behavior.

  • How much am I willing to spend on a new pair of shoes?
  • Is it worth walking an extra five minutes to the farther grocery store to save two dollars on a loaf of bread?
  • What is the lowest wage I am willing to accept to work this particular job?

Rational choice theory comes into play as we make economic decisions, both small and large, each and every day (“Introduction to rational choice theory in Social Work,” 2020).

Politics

It might not be as obvious how rational choice theory is involved in the world of politics. This theory mostly concerns our individual actions, so how does it relate to politics?

In reality, it is quite prevalent in this domain. The relations between nations, states, and even political actors and their voters are largely dictated by rational choice theory – the decisions made guide these relationships (Abbott & Snidal, 2013).

It also informs how leaders and other people in power make important decisions regarding a wide range of political issues, from climate change to gun control legislation.

Rational choice theory can also be used to explain, and sometimes even predict, voting behavior (“Introduction to rational choice theory in Social Work,” 2020).

Social Interactions

Like economics, the way we go about our daily social interactions is largely influenced by rational choice theory. This model helps to explain why we enter or leave individual or group relationships by viewing such relationships in the form of costs and rewards.

To make these decisions, we weigh out the pros (for example, approval of others) and cons (for example, embarrassment or another negative emotion) and use this information to guide our interpersonal relationships (“Introduction to rational choice theory in Social Work,” 2020).

Addiction

A more specific example, rational choice theory can be used to identify certain motivations behind addictive behavior and help provide alternatives to patients (“Introduction to rational choice theory in Social Work,” 2020).

This example emphasizes that rational choice theory is not only an explanatory model, but it can also sometimes even benefit our mental and physical well-being.

Nevertheless, despite this benefit, and the clear prominence of this theory, the rational choice model does not come without its setbacks.


Strengths and Weaknesses of the Theory

Rational choice theory greatly helps us understand why we make certain economic and social decisions. An obvious strength is just how versatile this theory is. It can be applied to almost any field, as we started to see above (Ganti, 2021).

Rational choice theory also makes reasonable and convincing assumptions about human behavior – it is not a made-up theory that isn’t grounded in anything empirical. Additionally, this model encourages decision makers (us!) to make rational decisions by considering the costs and benefits of our options, thus maximizing our payoffs (Ganti, 2021).

But rational choice theory does not only help with our understanding of rational decisions – it also helps explain why individual actors will make irrational decisions (Ganti, 2021). This theory helps guide our decision-making process and gives us a logical foundation to work off of.

Despite the strengths of rational choice theory, there are many weaknesses as well. A major critique is that rationality is bounded, or limited, when making a decision. As a result, we instead tend to make decisions that will be sufficient, rather than trying to make the best possible decision (Simon, 1990).

While rational choice theory assumes that humans are acting rationally, many scholars push back against this idea and argue that humans instead operate with a limited degree of rationality.

Similarly, many philosophers agree that humans don’t actually act rationally with the goal of maximizing their overall utility or wellbeing. And some sociologists, such as Pierre Bordieu, go as far as to say that humans don’t continuously make decisions based on rational information at all, but rather they rely on some innate practical sense that is built up as we make more and more decisions (Bourdieu, 2005).

Additionally, many researchers question the empirical validity of the research done to establish this theory of economics and social behavior (Green & Shapiro, 1994).

It becomes clear that while rational choice theory offers many benefits in terms of providing us insights into the way we make decisions, this theory, like all others, certainly does not come without its critiques.

Conclusion

Rational choice theory serves as a useful guide for understanding the basis of human decision making. We are constantly making choices every single day; from the moment we wake up to the minute we fall asleep. What should we wear? What should we eat? What should we say?

Rational choice theory does not claim to be the ultimate answer to all of our decisions, nor does it claim to describe the choice process in its entirety. Rather, it strives to predict the outcomes and patterns of choices, but like most models and theories, it is simply a guiding tool that helps make this complex world a bit simpler.

And while the goal of rational choice theory is primarily to maximize our own personal advantage, we oftentimes inadvertently benefit others too, as Adam Smith writes when describing his theory of the invisible hand. So, we really have rational choice theory to thank for keeping the world going and benefiting all of us along the way.

About the Author

Charlotte Ruhl is a member of the Class of 2022 at Harvard University. She studies Psychology with a minor in African American Studies. On campus, Charlotte works at an implicit social cognition research lab, is an editor for the undergraduate law review, and plays softball.

Fact Checking

Content is rigorously reviewed by a team of qualified and experienced fact checkers. Fact checkers review articles for factual accuracy, relevance, and timeliness. We rely on the most current and reputable sources, which are cited in the text and listed at the bottom of each article. Content is fact checked after it has been edited and before publication.

This article has been fact checked by Saul Mcleod, a qualified psychology teacher with over 17 years' experience of working in further and higher education. He has been published in psychology journals including Clinical Psychology, Social and Personal Relationships, and Social Psychology.

Cite this Article (APA Style)

Ruhl, C. (2022, Jan 22). Introduction to rational choice theory. Simply Sociology. https://simplysociology.com/rational-choice-theory.html

APA Style References

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