General Definition: Individuals will make the best possible (optimized) decision from their point of view (the view of the decision maker).
The Individual as Representative
Rational Choice Theory generally begins with consideration of the choice behavior of one or more individual decision-making units – which in basic economics are most often consumers and/or firms. The rational choice theorist often presumes that the individual decision-making unit in question is “typical” or “representative” of some larger group such as buyers or sellers in a particular market. Once individual behavior is established, the analysis generally moves on to examine how individual choices interact to produce outcomes.
Rational Choices of Consumer Behaviour
- The consumer faces a known set of alternative choices.
- For any pair of alternatives (A and B, say), the consumer either prefers A to B, prefers B to A, or is indifferent between A and B. This is the axiom of completeness.
- These preferences are transitive. That is, if a consumer prefers A to B and B to C, then she necessarily prefers A to C. If she is indifferent between A and B, and indifferent between B and C, then she is necessarily indifferent between A and C.
- The consumer will choose the most preferred alternative. If the consumer is indifferent between two or more alternatives that are preferred to all others, he or she will choose one of those alternatives -- with the specific choice from among them remaining indeterminate.
When economists speak of “rational” behavior, they usually mean only behavior that is in accord with the above axioms.
Criminology and Rational Choice Theory
Law Definition: Concept that criminals consciously weigh the risks and rewards of a crime and proceed accordingly.
In general, the criminology theory of rational choice theory is that would-be offenders consider the potential costs and benefits before deciding whether to engage in crime.
The rational choice perspective in criminology has evolved largely from two previous and complementary explanations of human behavior. One of these is the classical school of thought characterized by the Enlightenment scholars Cesare Beccaria (1764) and Jeremy Bentham (1789) . These early philosophers proposed that individuals would refrain from offending out of fear of the potential punishment that would result from such behavior (this is also the conceptual basis for the deterrence perspective in criminology).
Rational Choice Theory is based on the assumption that individual behaviour is guided by free will.
Individuals do not always seem to make rational, utility-maximizing decisions:
- The field of behavioral economics is based on the idea that individuals often make irrational decisions and explores why they do so.
- Nobel laureate Herbert Simon proposed the theory of bounded rationality, which says that people are not always able to obtain all the information they would need to make the best possible decision.
-Economist Richard Thaler’s idea of mental accounting shows how people behave irrationally by placing greater value on some dollars than others even though all dollars have the same value. They might drive to another store to save $10 on a $20 purchase, but they would not drive to another store to save $10 on a $1,000 purchase.