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 choice theory
more benefits than costs
(cost-benefit analysis)
- 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
RATIONAL CHOICE THEORY
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
technical assumptions about individuals’ preferences over alternatives
1.completeness
2.transivity
1) - 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 leach other
Completeness
2) - 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
occurs when an individual prefers al to a2 and does not view them as equally preferred.
Strict preference
implies that individual either strictly prefers al over az or is indifferent between them.
Weak preference
Assumptions of Rational Choice Theory
- Individualism
- Optimality
- Structures
- Self-Regarding Interest
- Rationality
It is the ability of individuals to ultimately take actions. (independent, self-reliant)
Individualism
