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Rational Choice Theory

Rational choice theory states that individuals make rational decisions to maximize their self-interest. Adam Smith was an early proponent of this theory in his book The Wealth of Nations. Rational choice theory assumes that people, called rational actors, make optimal decisions based on the information available to them. A key component is that people act in their rational self-interest. The invisible hand theory further developed these ideas by suggesting individuals pursuing their own self-interest can benefit the overall economy. While useful for explaining behavior, rational choice theory has limitations because people do not always act rationally and can be influenced by outside factors.

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Gian Lizette Vilar Landicho
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125 views

Rational Choice Theory

Rational choice theory states that individuals make rational decisions to maximize their self-interest. Adam Smith was an early proponent of this theory in his book The Wealth of Nations. Rational choice theory assumes that people, called rational actors, make optimal decisions based on the information available to them. A key component is that people act in their rational self-interest. The invisible hand theory further developed these ideas by suggesting individuals pursuing their own self-interest can benefit the overall economy. While useful for explaining behavior, rational choice theory has limitations because people do not always act rationally and can be influenced by outside factors.

Uploaded by

Gian Lizette Vilar Landicho
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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RATIONAL CHOICE

THEORY
WHAT IS RATIONAL
CHOICE THEORY?
RATIONAL CHOICE THEORY STATES THAT
INDIVIDUALS USE RATIONAL
CALCULATIONS TO MAKE RATIONAL
CHOICES AND ACHIEVE OUTCOMES THAT
ARE ALIGNED WITH THEIR OWN PERSONAL
OBJECTIVES. THESE RESULTS ARE ALSO
ASSOCIATED WITH MAXIMIZING AN
INDIVIDUAL'S SELF-INTEREST. USING
RATIONAL CHOICE THEORY IS EXPECTED TO
RESULT IN OUTCOMES THAT PROVIDE
WHO FOUNDED RATIONAL
CHOICE THEORY?
PHILOSOPHER ADAM SMITH WAS ONE
OF THE FIRST ECONOMISTS TO
DEVELOP THE UNDERLYING
PRINCIPLES OF THE RATIONAL CHOICE
THEORY. SMITH ELABORATED ON HIS
STUDIES OF SELF-INTEREST AND THE
INVISIBLE HAND THEORY IN HIS
BOOK “AN INQUIRY INTO THE NATURE
AND CAUSES OF THE WEALTH OF
WHAT IS RATIONAL ACTORS?

RATIONAL ACTORS
ARE THE INDIVIDUALS IN AN
ECONOMY WHO MAKE
RATIONAL CHOICES BASED
ON CALCULATIONS AND THE
INFORMATION THAT IS
WHAT IS SELF-
INTEREST?
RATIONAL SELF-INTEREST IS A
BEHAVIORAL ASSUMPTION THAT
ECONOMISTS MAKE ABOUT HOW
PEOPLE ACT UNDER DIFFERENT
ECONOMIC CONDITIONS. ACTING IN
AN ECONOMICALLY RATIONAL WAY
ENTAILS TAKING ACTIONS THAT
REDUCE COSTS AND INCREASE
BENEFITS FOR THE INDIVIDUAL.
WHAT IS INVISIBLE
HAND THEORY?
THE INVISIBLE HAND ITSELF IS A METAPHOR FOR THE UNSEEN
FORCES THAT INFLUENCE A FREE MARKET ECONOMY. FIRST AND
FOREMOST, THE  NVISIBLE HAND THEORY ASSUMES SELF-
INTEREST. BOTH THIS THEORY AND FURTHER DEVELOPMENTS IN
THE RATIONAL CHOICE THEORY REFUTE ANY NEGATIVE
MISCONCEPTIONS ASSOCIATED WITH SELF-INTEREST. INSTEAD,
THESE CONCEPTS SUGGEST THAT RATIONAL ACTORS ACTING WITH
THEIR OWN SELF-INTEREST IN MIND CAN ACTUALLY CREATE
BENEFITS FOR THE ECONOMY AT LARGE.
ACCORDING TO THE INVISIBLE HAND THEORY, INDIVIDUALS
DRIVEN BY SELF-INTEREST AND RATIONALITY WILL MAKE
DECISIONS THAT LEAD TO POSITIVE BENEFITS FOR THE WHOLE
ECONOMY. THE CONSTANT INTERPLAY OF INDIVIDUAL PRESSURES
ON MARKET SUPPLY AND DEMAND CAUSES THE NATURAL
PROS AND CONS OF RATIONAL
CHOICE THEORY
PROS CONS
 IT IS HELPFUL IN  INDIVIDUALS DO NOT
EXPLAINING ALWAYS MAKE
INDIVIDUALS AND RATIONAL DECISIONS.
COLLECTIVE  PEOPLE VALUE SOME
BEHAVIORS. PENNY MORE THAN
 ALL THEORIES OTHERS.
ATTEPMT TO GIVE  IN REALITY, PEOPLE
MEANING TO THINGS ARE OFTEN MOVES BY
WE OBSERVE IN THE EXTERNAL FACTORS
WORLD. THAT ARE NOT
WHAT ARE THE MAIN GOALS OF
RATIONAL CHOICE THEORY?
THE MAIN GOAL OF RATIONAL CHOICE
THEORY IS TO EXPLAIN WHY
INDIVIDUALS AND LARGER GROUPS
MAKE CERTAIN CHOICES, BASED ON
SPECIFIC COSTS AND REWARDS.
ACCORDING TO RATIONAL CHOICE
THEORY, INDIVIDUALS USE THEIR SELF-
INTERESTS TO MAKE CHOICES THAT
WILL PROVIDE THEM WITH THE
WHAT ARE THE STRENGTHS OF
RATIONAL CHOICE THEORY?
ONE OF THE STRENGTHS OF RATIONAL
CHOICE THEORY IS THE VERSATILITY OF ITS
APPLICATION. IT CAN BE APPLIED TO MANY
DIFFERENT DISCIPLINES AND AREAS OF
STUDY. IT ALSO MAKES REASONABLE
ASSUMPTIONS AND COMPELLING LOGIC. THE
THEORY ALSO ENCOURAGES INDIVIDUALS TO
MAKE SOUND ECONOMIC DECISIONS. IT IS
POSSIBLE FOR AN INDIVIDUAL TO ACQUIRE
MORE TOOLS THAT WILL ALLOW THEM TO
THANKYOU FOR
LISTENING!

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