LESSON 1(RATIONAL CHOICE THEORY) Flashcards
people behave as they do because
they believe that performing their
chosen actions has more benefits
than costs (cost–benefit analysis)
RATIONAL CHOIVE THEORY
an amount that has to be
paid or spent to buy or obtain
something.
COST
an advantage or profit
gained from something
BENEFIT
can be traced back to the political
economist and philosopher
ADAM SMITH
looks at three concepts:
1) rational actors;
2) self interest; and
3) the invisible hand.
metaphor that describes the incentives
which free markets sometimes create for
self-interested people to accidentally act in the public interest, even when this is not
something they intended.
THE INVISIBLE HAND
for any two alternatives ai
and aj in the set, either ai is preferred to aj, or aj is preferred to ai, or the individual is
indifferent between ai and aj. In other words, all pairs of alternatives can be compared with each other.
COMPLETENESS
if alternative a1 is preferred to
a2, and alternative a2 is preferred to a3, then
a1 is preferred to a3.
TRANSITIVITY
The preference between two alternatives can
be:
1) Strict preference
2) Weak preference
3) Indifference
Assumptions of Rational Choice Theory
1. Individualism
2. Optimality
3. Structures
4. Self-Regarding Interest
5. Rationality
It is the ability of individuals to ultimately take actions. (independent, self-reliant)
INDIVIDUALISM
Individuals choose their actions optimally, given their individual preferences as well as the opportunities or constraints with which the individuals face. (best or most effective)
OPTIMALITY
These structures and norms that dictate a single course of action are merely special
cases of rational choice theory.
STRUCTURES
This assumption states that the actions of an individual is concerned entirely with his/her own welfare.
SELF REGARDING INTEREST
It is the most predominant assumption of the rational choice theory.
RATIONALITY
