Lesson 2: Rational Choice Theory

• Rational choice theory (RCT)


  A theory that states that individuals use their personal preferences to choose a course of action to acquire personal interest, power, and wealth
• RCT was first idealized by Adam Smith


  Eighteenth century
• Adam Smith proposed that the market could benefit if they were left alone with their decisions
• Rationality


  Following reason or logic
• Two fundamental principles of RCT

  • Rationality/Goal Orientation
  • Self-interest
• Rationality/Goal Orientation


  Our decisions are goal-oriented; people's interest leads to collective action; Collective action produces a collective goal
• Self-interest


  People determine their wants and needs which affect their decisions; People tend to evaluate the benefits and risks of their actions for their interests before making a decision; People can determine which action or decision yields the best consequence
• Methodological individualism


  An assumption that events, no matter how complex, can be explained by individual actions or interactions
• Strategic actions


  An individual is both strategic and rational; people are wealth maximizers who pick good strategies or decisions to get the best returns while thinking about the risks
• External factors


  Beliefs, values, and environments that affect our decisions
• RCT is a theory that states that we do actions based on what we deem as profitable or good for us while considering external factors