Rational Choice Theory Research Paper

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The notions of rationality, rational choice, and rational beliefs have a central place in many of the social sciences. Although originally deployed mainly in economics, they are increasingly being incorporated into sociology and political science. (They have not gained the same importance in social anthropology.) Some scholars argue that by virtue of its simplicity, universality and explanatory power the theory of rational choice is, or should be, the unifying framework for all the social sciences. As an explanatory theory it harbors formal and empirical problems that suggest a need for alternative approaches. At the same time, whatever its explanatory flaws, the notion of rationality retains a normative privilege, because we want to be rational (Føllesdal 1982). Rational choice theory is primarily prescriptive: it tells agents what to do to achieve their ends as well as possible. Social scientists may then try to explain their behavior by assuming that they do what the theory tells them to do.

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1. The Development Of Rational Choice Theory

The modern notion of rationality did not emerge until this century. Earlier references to rationality were to ratio, or ‘reason,’ understood as the faculty of calm and deliberative choice, as opposed to emotion. In the words of David Hume (1960, p. 415), ‘Reason is, and ought only to be, the slave of the passions.’ Some writers opposed reason both to interest and emotion: ‘Nothing is easier for passion than to overcome reason; its greatest triumph is to conquer interest’ (De La Bruyere 1990, IV.77). In this tradition, reason implies not only a dispassionate but also a disinterested and impartial attitude.

1.1 The Economic Meaning Of Rationality

The modern concept of rationally as, essentially, means–end efficiency owes much to the marginalist revolution in economics in the last third of the nineteenth century. By conceptualizing the consumer’s choice and the producer’s choice as involving tradeoffs among different consumption goods or different factors of production, the marginalists made it possible to think more systematically about the optimal choice of means for a given end. A profit-maximizing employer, for instance, would react to a wage increase by using more nonlabor inputs and less labor.

1.2 Max Weber

In Economy and Society, Weber (1968, p. 24) offered an influential definition of instrumentally rational (zweckrational) action: it is ‘determined by expectations as to the behavior of objects in the environment and of other human beings; these expectations are used as ‘‘conditions’’ or ‘‘means’’ for the attainment of the actor’s own rationally pursued and calculated ends.’ Although Weber’s professed aim was to offer a purely subjective notion of rationality as coherence among action, ends, and beliefs, some of his analyses point to a more objective definition in terms of successful adaptation to the environment (Elster 2000). The closing pages of the Protestant Ethic (Weber 1958) suggest that he was influenced by the fact that market competition generates objectively successful behavior by eliminating those who fail.

1.3 The Emergence Of Game Theory

Weber (1968) writes that ‘in attempting to explain the campaign of 1866, it is indispensable in the case of [the two main generals] to attempt to construct imaginatively how each, given fully adequate knowledge both of his own situation and of that of his opponent, would have acted.’ Weber does not seem to be aware of the need to ‘construct imaginatively’ how each general would try to ‘construct imaginatively’ what the other would be doing, including their further constructive imaginings, and so on. The modern theory of interdependent decisions, or (in somewhat misleading language) ‘game theory,’ emerged only after Weber’s death. Neumann and Morgenstern (1944) and Nash (1950) showed how one can avoid the infinite regress lurking in the phrase ‘and so on’ by the notion of ‘equilibrium’, defined as a set of individual choices each of which is optimal, given the others.

1.4 The Emergence Of Decision Theory

In much of rational choice theory, the intuitive notions of desire and belief are replaced by those of preference (or utility) and subjective probability. In a pioneering work, Ramsey (1931) showed how one can elicit utilities and subjective probabilities by asking subjects to respond to various hypothetical bets. Later, Savage (1954) offered an alternative demonstration. The key conclusion of these and later works in the same tradition is that rational actors maximize expected utility. The agent is assumed to face a well-defined set of feasible courses of action, each of which can with definite probabilities result in various outcomes, each of which has a definite utility for the agent. A rational agent will then choose the action that maximizes the average (or expected) utility of the outcomes associated with it.

2. The Structure Of Rational Choice

In defining rationality, one can emphasize rational choice or rational action. In the latter approach, one can define rational action as action that results from rational choice or more objectively as success or adaptation to the environment. Even if social agents do not make rational choices, they may be constrained by their environment to act rationally. As noted above, this outcome may be produced by competition. In a population of firms, we may observe profit-maximizing behavior even if none of the decision-makers have profit-maximizing intentions, simply because firms that do not maximize profit are eliminated (Alchian 1950). As noted by Nelson and Winter (1982), the argument assumes that the environment is sufficiently stable for the process of elimination to have time to do its work. With a rapidly changing environment, the selection process is tracking a moving target and may not bring about optimal behavior.

2.1 A Basic Model

A widely used model of rational choice (and rational action) is captured in Fig. 1. In this diagram, the arrows represent three optimality relations. To be rational, an action has to be the best means to realize the agent’s desire, given his or her beliefs. The beliefs must be well-grounded in the evidence available to the agent. The information must reflect an optimal investment in the acquisition of new information. (Because investing in information-gathering is an action, we may think of it as a shadow action that accompanies the primary action.) A rational choice is the choice of a rational action because it is the rational thing to do, excluding cases in which the agent makes the rational choice by fluke.

Rational Choice Theory Research Paper

2.2 The Model Is Subjective Through And Through

A choice and the subsequent action are rational only by virtue of the optimality relations among elements of the agent’s mental set. A rational action may fail, if the agent has false (but well-grounded) beliefs. The relation between beliefs and evidence must not be confused with the relation between beliefs and the world. In inferring beliefs from the evidence a rational agent would use the procedures which in the long run yield the largest number of true beliefs, weighed by their subjective importance to the agent. Yet on any given occasion this procedure may lead to the formation of a false belief.

In the model, the desire is the ‘unmoved mover.’ The agent’s desires allow us to assess the optimality of actions, beliefs, and information-gathering, but they are not themselves subject to rationality or optimality assessments. In some cases, this may seem counter-intuitive. In the case of the agent’s time preferences (a subset of the desires), we might want to say that an agent who discounts the future very heavily is irrational. The life of somebody who pays very little attention to the future consequences of present behavior is likely to be nasty, brutish, and short. Yet for the purposes of explaining the agent’s behavior, this fact is irrelevant. Similarly, it may be tempting to say that a belief which (to us) is obviously false is irrational. Yet if it is part of the belief that the costs of testing it are very high, the agent may be caught in a belief trap (Mackie 1996) in which it is rational to hold on to the false belief. In applying rational choice theory, one has to adopt the point of view of the agent and recognize that the eye cannot see beyond its horizon.

2.3 Belief–Desire Interactions

As shown in Fig. 1 the model explicitly excludes a direct influence of desires on beliefs, as in wishful thinking. The converse possibility is that desires might be shaped by the beliefs, as when the belief that something is inaccessible stifles the desire for it (‘sour grapes’) or enhances it (‘the grass is greener’). The general principle that desires cannot be assessed as more or less rational precludes us from qualifying desires shaped in these ways as irrational, however undesirable they might be on other grounds.

Rationality is, however, compatible with an indirect influence of desires on beliefs. As indicated in Fig. 1, the optimal amount of investment in evidence-gathering is shaped not only by beliefs (about the expected costs and benefits of gathering information), but also by desires. As beliefs are rationally shaped by evidence, it follows that beliefs may be rationally sensitive to desires. Consider two doctors who have to diagnose two identical patients with severe injuries. One is a GP who wants to save the patient’s life and who knows that spending too much time on the correct diagnosis might undermine that goal. The other is a Nazi doctor in a concentration camp, who is unconcerned about the patient’s survival and thus of the opportunity costs of information-gathering. Because of the different desires, the latter is more likely to form a correct belief.

2.4 Some Common Misunderstandings

Rational choice theory is often criticized, sometimes with good arguments, and sometimes with bad. Although some of the bad arguments may apply to bad versions of the theory, critics ought to address the best versions. The most common misunderstanding is that the theory assumes agents to have selfish motivations. Rationality is consistent with selfishness, but also with altruism, as when someone is trying to select the charity where a donation can do the most good.

Rational choice theory is also sometimes confused with the principle of methodological individualism. True, the theory presupposes that principle. Talk about beliefs and desires of supra-individual entities, such as a class or a nation, is in general meaningless. The converse does not hold, however. Some of the alternatives to rational choice theory also presuppose methodological individualism.

Furthermore, it is sometimes asserted that the theory is atomistic and that it ignores social interactions. Almost the exact opposite is true. Game theory is superbly equipped to handle three important interdependencies: (a) the welfare of each depends on the decisions of all; (b) the welfare of each depends on the welfare of all; and (c) the decision of each depends on the decisions of all. It is also sometimes asserted that the theory assumes human beings to be like powerful computers, which can instantly work out the most complex ramifications of all conceivable options. In principle, rational choice theory can incorporate cognitive constraints on a par with physical or financial constraints. In practice, the critics often have a valid point.

Finally, it is sometimes asserted that the theory is culturally biased, reflecting (and perhaps describing) modern, Western societies or their subcultures. However, the minimal model set out above is transhistorically and transculturally valid. This statement does not imply that people always and everywhere act rationally, nor that they have the same desires and beliefs. It means that the normative ideal of rationality embodied in the model is one that is explicitly or implicitly shared by all human beings. People are instrumentally rational because they adopt the principle of least effort. ‘Do not cross the river to fetch water,’ says a Norwegian proverb. Also, as people know that acting on false beliefs undermines the pursuit of their ends, they want to use cognitive procedures that reduce the risk of getting it wrong when getting it right matters. That they often fail to adopt the right procedures does not undermine the normative ideal.

3. Some Problems

As an explanatory approach, rational choice theory faces two objections. The first is formal: under certain circumstances the notions of rationality or optimality are not uniquely defined or not defined at all. This is the problem of indeterminacy. The other is empirical: sometimes the social agents do not behave as the theory predicts they will. This is the problem of irrationality.

3.1 Indeterminacy

The problems of non-unicity or non-existence of an optimal solution arises at each of the three levels in Fig. 1

At the level of action, indeterminacy can arise if the agent’s preference ordering is incomplete, i.e., for a pair of options a and b, the agent neither prefers a to b, nor b to a, nor is indifferent between them. This case can arise if the options are very different from each other and from what the agent has experienced in the past, as in choosing a career or a spouse.

At the level of beliefs, indeterminacy—meaning that the agent has no reliable grounds for assigning probabilities to the possible outcomes—can take the form either of raw uncertainty or of strategic uncertainty. The former is illustrated by natural disasters or by the process of technical innovation. The latter is illustrated by games in which there are several equilibria none of which can be unambiguously singled out as ‘superior’ or ‘natural’ (in the sense of Schelling 1960). An example involving both forms of uncertainty involves investment by firms in research and development (Dasgupta and Stiglitz 1980).

At the level of information-gathering, indeterminacy arises through an infinite regress. To decide how much information to gather, one must first form beliefs about the expected costs and benefits of information. The formation of these beliefs also requires the acquisition of information, and so on (Winter 1964). Although the regress can be avoided in repeated and stereotyped situations such as many medical diagnoses, it is unavoidable when, as in warfare, there is both an urgent need to act and no precedent to rely on.

3.2 Irrationality

In this case, too, irrationality arises at all three levels. The problems are of two kinds. ‘Cold’ problems are caused by cognitive malfunctioning without any motivational bias. ‘Hot’ problems arise through such bias.

At the level of action, cold problems arise in many ways. Choices are sensitive to how questions are framed—whether the glass is described as half empty or as half full (Tversky and Kahneman 1981). Many people are prone to the ‘sunk cost fallacy,’ i.e., to pursue a project simply because they have already invested much in it (Arkes and Blumer 1985). Hot problems can arise when people act under the influence of emotion, e.g., by wanting to take action immediately instead of taking time to maximize the chance of success. Under the influence of addictive cravings one may fail to carry out a decision to quit. (See Elster 1999 for both issues.)

At the level of belief formation, cold problems can arise because people fail to understand the nature of statistical inference. During World War II Londoners were persuaded that the Germans systematically concentrated their bombing in certain parts of their city, because the bombs fell in clusters. This invalid inference reflected a lack of understanding of the statistical principle that random processes usually generate clustering (Feller 1968, p. 161). Flight instructors who noticed that praise for an unusually smooth landing is typically followed by a poorer landing on the next try while criticism after a rough landing is followed by an improved performance, concluded that rewards are less effective than punishments. This invalid inference reflected a lack of understanding of the statistical principle of regression to the mean (Tversky and Kahneman 1974). Hot problems arise when ‘the wish is father to the thought,’ as in self-deception and wishful thinking. Coffee drinkers are less inclined to believe evidence of negative effects of caffeine (Kunda 1987). Those who work in risky occupations tend to believe the risks are less than they actually are (Akerlof and Dickens 1982).

Less is known about cold errors in information gathering. One might conjecture that people may invest too much in information because they under- estimate opportunity costs compared to out-of-pocket expenses (Thaler 1980). A common hot mistake also involves overinvestment, when people have a strong desire to have sufficient reasons for their decisions even when cost–benefit analysis suggests that flipping a coin might be superior (Elster 1989a). Motivational biases can also, however, lead to underinvestment: ‘Marry in haste, repent at leisure.’

4. Alternatives

Problems such as those discussed above have stimulated the search for alternative theories. Some theories address the issue of indeterminacy as well as ‘cold’ deviations from rationality, others the ‘hot’ deviations.

4.1 Bounded Rationality And Behavioral Economics

Some alternatives try to identify the cognitive mechanisms that produce deviations from what rational choice theory predicts.

The research program on ‘bounded rationality’ stems from Herbert Simon (1954). Nelson and Winter (1982) is an outstanding application. The core assumption is that agents ‘satisfice,’ by choosing an option that is ‘good enough,’ rather than maximize. Agents do not look for better alternatives if the status quo is satisfactory. If it falls below the agent’s aspiration level, a search for new options is triggered until a new, satisfactory outcome is found. The theory has a good match to common sense (‘Never change a winning team’) and captures the heavy dependence of many choices on search procedures. By eschewing the maximizing assumption, it avoids problems of indeterminacy.

The research program on ‘behavioral economics’ or ‘quasi-rational economics’ (Thaler 1991) stems from the work of Kahneman and Tversky (Kahneman et al. 1982, Kahneman and Tversky 2000). In addition to identifying many of the ‘cold’ anomalies discussed above, these authors tried to account for them by means of ‘prospect theory.’ It deviates from rational choice theory by assuming that agents evaluate gains and losses by how much they deviate from a reference point rather than in absolute terms, and that they are more risk-averse for losses than for gains. These two assumptions explain, for instance, that people who refuse to use credit cards when they are said to carry a surcharge accept them when the charge is redescribed as a cash discount.

4.2 Emotions And Social Norms

Other theories try to identify the motivational mechanisms that generate anomalies. Frijda (1986, pp. 118–21) argues that emotions cause deviations from rationality in many ways: (a) they affect ‘probability and credibility estimates’ concerning events outside one’s control; (b) they ‘cause some measure of belief in the efficacy of actions one would not believe in under other conditions’; (c) they induce fantasy behavior, as when a widow for many years after the death of her husband sets the table for two each day; (d) they induce various forms of ‘painful fantasies that, however painful, are yet sought by the subject himself.’—Othello’s jealousy is cited as an example; and (e) they cause irrational behavior, such as ‘anger at some deed that cannot be undone by the angry aggression, nor its recurrence prevented.’ In addition, as mentioned earlier, they induce suboptimal investment in information. Loewenstein (1996) generalizes these ideas, by appealing to a broad range of ‘visceral factors’ that interfere with rational choice and rational cognition. In addition to emotion, these include hunger, thirst, pain, and the euphoria or dysphoria created by addictive drugs or abstinence from them.

Rational choice theory is consequentialist, in that it enjoins people to act in certain ways because of the expected outcomes. Social norms typically prescribe acts for their own sake, not for their consequences. In their simplest form, they take the form of unconditional imperatives: ‘always wear black at funerals.’ They may be contrasted with conditional, outcome oriented imperatives: ‘always wear black in strong sunshine’ (as do people in Mediterranean countries to maintain circulation of air between the clothes and the body). Social norms regulate the use of money, how hard people work at their jobs, the occasions for and modalities of revenge, sexual behavior, and many other matters (Elster 1989b). They are sustained largely by the emotions of contempt and shame.

5. Conclusion

Many rational choice theorists will respond either that some of the alleged problems are empirically insignificant or that the alternative explanations can be restated within the rational choice framework. These are ongoing debates with many unresolved questions. Overall, however, it is increasingly hard to deny that rational choice theory has serious limitations. Empirical research increasingly shows that human beings are severely limited in their cognitive functioning, and, when under the influence of emotion and other strong feelings, liable to act in ways that undermine their ends. Paraphrasing Veyne (1976, p. 676), beliefs born of passion serve passion badly. At the same time, there is no single rival or contender that could replace rational choice theory. For one thing, most people are rational much of the time. For another, the various alternatives to the theory have not been integrated with one another, and are unlikely to be so. There is no other theory that explains as much of human behavior, although the jury is still out on how much it explains.


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