My views on Rational Choice Theory.
Written at Georgetown University as a student of the Economic Policy Summer Academy.
Rational Choice Theory is one of the foundational ideas in economics. It posits that individuals make decisions by logically evaluating options to maximize personal benefit. While people don't always have perfect information or unlimited options, the theory states that most choices are purposeful. Evaluated by the costs and benefits of each option, the choice with the greatest net benefit is most often chosen. These choices are almost always chosen by self-interests of the person, which may be material, social, or altruistic and can be seen throughout every area of life. These patterns stabilize over time and reflect a coherent pattern about the person who makes certain decisions over others. The ideas behind the theory were developed from Adam Smith’s an Inquiry into the Nature and Causes of the Wealth of Nations (Smith, 1776). Which discusses how human nature leads toward self-interest, and this collective self-interest leads toward the “invisible hand” that unintentionally benefits humanity as a whole. Self-interest is the most important aspect of human behavior that is essential to the theory and was derived from Smith’s work.
RCT as a complex theory has its strengths and weaknesses, critics will highlight the oversimplification of behavior or irrational factors in decision making, but RCT also shows clear strengths with predictive power, universal application, and insights into behavior. The first limitation of RCT is the inability to account for complex behavior, because it is assumed everyone makes rational decisions; it doesn't take into account emotional or non-rational decisions. For example, people may choose a career for a variety of reasons that have a mix of rational and non-rational motives. A nurse may love helping people, but they also understand that nursing is stable and makes an above average income. The second limitation is when irrational factors influence decision making, sometimes people commit unintelligent actions that are net negatives in the long run. Skipping school may give you free time and allow you to dilly daily, but not getting an education or a high school diploma will close many doors for you and lower your standard of living. While RCT may be true, outside influences can still and irrational thinking can still affect decision making. The predictive power of RCT is one of the major abilities it possesses, it allows economists to predict how businesses, policymakers, or individual consumers will act. This makes RCT an extremely practical tool for making decisions that affect people. As people’s rational choices may be changed when circumstances are different. That predictive power is universally applicable across disciplines. RCT can be used to explain voter turnout, consumer purchases, corporate strategies, etc. The insight that RCT gives in these disciplines is extremely important and allows people to understand that units are rational actors who want to maximize their utility. This allows for better-informed negotiations, conflicts, and collaborations.
In my opinion, I believe the Rational Choice Theory accurately represents people’s decision making and I find it highly convincing. Take Pew Research Center’s 2020 report on economic inequality that illustrates how RCT influences how certain people interpret economic outcomes. 74% of higher-income Republicans held the view that “the different life choices people make” lead to income inequality, while only 46% of lower-income Republicans agreed to that same point. While simultaneously high-income republicans say only 17% of income inequality comes from “Some people start out with more start out with more opportunities than others” while 34% of lower income Republicans share the same viewpoint. These findings greatly support Rational Choice Theory, as higher-income Republicans want to protect the idea that success comes from effort, and not an inherent structural advantage. In order to justify less welfare taxes or estate tax, their answers reflect a belief in limiting redistribution, which is the most rational choice in order to keep wealth inside their family. Lower income Republicans are much more likely to say that life decisions do not matter, and structural aspects drive inequality than higher income Republicans. This is because the most rational choice for them is public support and policy intervention to improve their lives. Despite Republicans disliking those policies, due to conservative values which is why it may still be seen as low compared to a democratic view. This is because people do not have perfect information, so they will have different perspectives on things based on socialization, personal experiences, and a community culture. This shows RCT’s value as a predictor; individuals interpret their economic systems through their own lens of circumstances and self-interest. Rational Choice Theory remains one of the most useful frameworks because it understands human nature, that people act in self-interest. Despite social class, political party, or economic background, understanding those responses has given me valuable insight into how societies and economies function.
