RATIONAL DECISION-MAKING
People use all of the People try to maximise People make
information available total satisfaction independent choices
The assumption of
rationality has dominated
standard economic thinking
and orthodox theory for
decades:
Consumers have
stable preferences
RATIONAL CHOICE THEORY TUTOR2U.NET/ECONOMICS
RATIONAL DECISION-MAKING
People use all of the People try to maximise People make
information available total satisfaction independent choices
The assumption of The key assumption behind
rationality has dominated rational behaviour is that
standard economic thinking people make choices to
and orthodox theory for maximise the satisfaction
decades: they get from spending a
Consumers have limited budget.
stable preferences
RATIONAL CHOICE THEORY TUTOR2U.NET/ECONOMICS
THE DOMINANT ASSUMPTION OF RATIONAL CHOICE
• For a long time, economists believed that people were rational, self-
interested actors who made decisions based on maximizing their own
utility or benefit.
• This assumption is called the rational choice theory, and it was (and still is!)
a dominant paradigm in economics.
• This theory suggests that individuals have complete information, act in
their own self-interest, and make decisions that maximize their own
welfare. However, the behavioural economics revolution challenged this
assumption by highlighting how people often make decisions that are not
fully rational and are influenced by emotional, cognitive, and social factors.
RATIONAL CHOICE THEORY TUTOR2U.NET/ECONOMICS
RATIONAL ASSUMPTION: MAXIMISING UTILITY
• The idea of maximizing utility is central to the rational choice theory.
• Utility is basically the satisfaction or benefit that a person gets from
consuming a good or service.
• In economics, utility is often measured in terms of "utils," which are
basically abstract units of utility. The goal of maximizing utility is to make
decisions that provide the most utility or benefit to the individual.
• For example, someone might choose to spend money on a concert ticket
because they anticipate that it will give them a high level of utility (i.e.,
enjoyment). The idea is that people are always trying to maximize their
utility or satisfaction in every decision they make given a limited budget.
RATIONAL CHOICE THEORY TUTOR2U.NET/ECONOMICS
RATIONALITY REQUIRES FULL INFORMATION
• The rational choice theory assumes that people have perfect information
about the options available to them and the consequences of each option.
• In other words, they have all the information they need to make the most
rational choice.
• However, people often have imperfect or incomplete information.
• For example, they may not be aware of all the alternatives available to
them, or they may not have a complete understanding of the costs and
benefits of each option.
• In other words, imperfect information can lead to suboptimal decisions.
RATIONAL CHOICE THEORY TUTOR2U.NET/ECONOMICS
HOMO ECONOMICUS
CALCULATING EVERY CAN COMPUTE FEEL NO EMOTION
COST & BENEFIT PROBABILITIES OR REGRET
Homo economicus is based on the idea that people are rational and self-interested and make decisions based on maximizing
their own utility or satisfaction. This model assumes that people have complete information about their options and the possible
consequences of their decisions, and that they make these decisions without any irrationality, emotion, or outside influences.
RATIONAL CHOICE THEORY TUTOR2U.NET/ECONOMICS
