The Rational Choice Model

The Rational Choice Model
The Rational Choice Model

Although this is not about traditional economics, something can be discussed from the perspective of traditional economics. Traditional approaches to economic decision-making invoke the so-called rational choice model.

Just a framework

The rational choice model is a framework for understanding and often formally modeling social and economic behavior. But what does it mean? The term rational carries so much baggage and leaves so many misconceptions that I want to unpack what is typically assumed by rational choice model.

A first misconception is that the word rational means the same thing in everyday conversation is it does the behavioral economists and other decision scientists. When we describe one of our friends is rational we often want to implied their dispassionate, logical, thoughtful and in control of their actions.

Book and film characters like the detective Sherlock Holmes or the Star Trek character Mr. Spock seem Prototypically rational. They deductively reason through complex problems to arrive at a solution without ever being burdened by unwanted emotion.

Consistency with a model

Rational to a decision scientist means consistency with some model. Rational decisions are not necessarily dispassionate nor well reasoned nor selfish. They aren’t even necessarily good decisions from others perspectives, they simply are consistent.

Consistency seems like a pretty straightforward criterion and a rational decision maker should always prefer better things to worse things, more money to less. Decision-makers should be able to assess which choices lead to more desirable outcomes.

In the language of economics they should anticipate how much subjective value or utility that would come from the choices and they should reliably make those choices that maximize their expected utility. We should be able to take the past decisions of a rational decision maker and insert them into a mathematical model to predict their future decisions.

Conversely, someone whose preferences are inconsistent and capricious would hardly be a rational decision-maker. Inconsistency shouldn’t apply to consumer purchases alone. It should apply to all behavior.

Strange choices

Most people voluntarily choose something they say is objectively worse or something objectively better. This bias arises for several reasons that will cover in this course most notably that people treat rare and vivid outcomes as more likely than they really are.

So if one hears that there is an objective 1% chance of recurring diarrhea and that 1% seem subjectively like about 5% leading to overweighting of small probabilities and inconsistencies in their choices.

The selfish decision-maker

A second misconception is that a rational decision-maker must be completely selfish. Rational choice models do not assume anything about what a decision-maker prefers. They only state that those preferences consistently lead to choices.

So it may be rational to give to charity, to volunteer your time to help others or to make sacrifices for the greater good. All of those actions are consistent with traditional economic models assuming that someone derides utility not only from their own outcomes but also from the outcomes experienced by others.

The rational decision process

The third misconception is that rationality refers to the decision process. Rational does not mean that a decision was generated by a logical or conscious or reason process, instead rationality refers to the outcome of decisions.

Rational choice models are sometimes called as if models, meaning that choice behavior can be described as if someone followed a rational process regardless of the underlying thoughts beliefs or computations.

Rational decisions don’t require the intellect of a Sherlock Holmes or the calmness of Mr. Spock. In fact later in this course will consider situations where the decisions of animals seem to follow rational choice models, often better than humans.

By successdotinc

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