Rational Choice Theory - Actions, Assumptions, and Individual Preferences

Actions, Assumptions, and Individual Preferences

The basic idea of rational choice theory is that patterns of behavior in societies reflect the choices made by individuals as they try to maximize their benefits and minimize their costs. In other words, people make decisions about how they should act by comparing the costs and benefits of different courses of action. As a result, patterns of behavior will develop within the society that result from those choices.

The idea of rational choice, where people compare the costs and benefits of certain actions, is easy to see in economic theory. Since people want to get the most useful products at the lowest price, they will judge the benefits of a certain object (for example, how useful is it or how attractive is it) compared to similar objects. Then they will compare prices (or costs). In general, people will choose the object that provides the greatest reward at the lowest cost.

Rational decision making entails choosing a "rational" action given one's preferences, the actions one could take, and expectations about the outcomes of those actions. Actions are often expressed as a set, for example a set of j exhaustive and exclusive actions:

For example, if a person is to vote for either Roger or Sara or to abstain, their set of possible voting actions is:

Individuals can also have similar sets of possible outcomes.

Rational choice theory makes three assumptions about individuals' preferences for actions:

• Completeness – all actions can be ranked in an order of preference (indifference between two or more is possible).
• Transitivity – if action a₁ is preferred to a₂, and action a₂ is preferred to a₃, then a₁ is preferred to a₃.
• Independence of irrelevant alternatives - If A is preferred to B out of the choice set {A,B}, then introducing a third alternative X, thus expanding the choice set to {A,B,X}, must not make B preferable to A.

Together these assumptions form the result that given a set of exhaustive and exclusive actions to choose from, an individual can rank them in terms of his preferences, and that his preferences are consistent.

An individual's preferences can also take forms:

• Strict preference occurs when an individual prefers a₁ to a₂, but not a₂ to a₁.
• In some models, a weak preference can be held in which an individual has a preference for at least a_j, similar to the mathematical operator ≤.
• Indifference occurs when an individual does not prefer a₁ to a₂, or a₂ to a₁.

In more complex models, other assumptions are often incorporated, such as the assumption of independence axiom. Also, with dynamic models that include decision-making over time, time inconsistency may affect an individual's preferences.