Rational choice theory Flashcards
What is rational choice theory
School of thought based on the assumption that individuals choose a course of action that is most in line with their personal preference
Expected utility theory
The assumption that people should aim to maximise their utility and ought to o bey the formal axioms, which are logical assumptions
Axioms - optimisation
Our goal in decision making is to maximise our utility, seeking the single option that affords us the most satisfaction
Axioms - Complete preferences
We are able to compare every possible option to one another and to rank them all according to the satisfaction they accord us
Axioms - Stable preferences
We maintain our ranking of options unless the nature of those options change
Axioms - preferences are reflexive
When we are faced with two identical options, we are indifferent between them, so naturally assign them to the same position in our ranking of options
Axioms - Preferences are transitive
If we prefer option A to option B and prefer B to C, then logically, we must prefer option A to option C
Axioms - ownership
Whether we initially possess an item does not affect our valuation of it nor our terms when it comes to trading it
Axioms - Isolated decision making
We make decisions entirely on our own preferences, independently from any other influences from other people, we solely seek to maximise our own utility
