Rational choice is not a psychological theory of how human beings choose, or a normative theory of what they ought to choose, but a theory of what makes choices consistent with the chooser’s values and each other. That ties it intimately to the concept of rationality, which is about making choices that are consistent with our goals.

We call people “crazy” when they do things that are patently against their own interests, like throwing away their money on things they don’t want or running naked into the freezing cold. 

Axioms of Rational Choice

Rational Choice Theory takes off from a few axioms that are easy to accept: broad requirements that apply to any decision maker we’d be willing to call “rational.” It then deduces how the decider would have to make decisions in order to stay true to those requirements. The axioms have been lumped and split in various ways; the following version was formulated by the mathematician Leonard Savage and codified by the psychologists Reid Hastie and Robyn Dawes. (Hastie, R., & Dawes, R. M. (2009). Rational Choice in an Uncertain World: The Psychology of Judgment and Decision Making (Second edition). SAGE Publications, Inc.

1. Commensurability: for any options A and B, the decider prefers A, or prefers B, or is indifferent between them. This requires the decider to commit to one of the three, even if it’s indifference. The decider never falls back on the excuse “You can’t compare apples and oranges.”  We can interpret it as the requirement that a rational agent must care about things and prefer some to others.

2. The second axiom is Transitivity. When you compare options two at a time, if you prefer A to B, and B to C, then you must prefer A to C. (Violating it leads to "money pumps:" Suppose you prefer an Apple iPhone to a Samsung Galaxy but you have a Galaxy. I will now sell you an iPhone for $100 with the trade-in. Suppose you also prefer a Google Pixel to an iPhone. Great! You’d certainly trade in that iPhone for the superior Pixel plus a premium of, say, $100. And suppose you prefer a Galaxy to a Pixel  - you violated the rational choice rule, now it is a case of intransitivity. For $100 plus a trade-in, I’ll sell you the Galaxy. You’d be right where you started, $300 poorer, and ready for another round of trades.)

3. Closure. Choices are not always among certainties, like picking an ice cream flavor, but may include a collection of possibilities with different odds, like picking a lottery ticket. The axiom states that as long as the decider can consider A and B, that decider can also consider a lottery ticket that offers A with a certain probability, p, and B with the complement probability, 1 – p. Within rational choice theory, although the outcome of a chancy option cannot be predicted, the probabilities are fixed, like in a casino. This is called risk, and may be distinguished from uncertainty, where the decider doesn’t even know the probabilities and all bets are off....The theory of rational choice is a theory of decision making with known unknowns: with risk, not necessarily uncertainty.

4. The fourth axiom is Consolidation. Life doesn’t just present us with lotteries; it presents us with lotteries whose prizes may themselves be lotteries. A first date, if it goes well, can lead to a second date, which brings a whole new set of risks. This axiom simply says that a decider faced with a series of risky choices works out the overall risk according to the laws of probability. If the first raffle ticket has a one-in-ten chance of a payout, with the prize being a second ticket with a one-in-five chance of a payout, then the decider treats it as being exactly as desirable as a ticket with a one-in-fifty chance of the payout.

5. The fifth axiom is Independence. If you prefer A to B, then you also prefer a lottery with A and C as the payouts to a lottery with B and C as the payouts (holding the odds constant). That is, adding a chance at getting C to both options should not change whether one is more desirable than the other. Another way of putting it is that how you frame the choices—how you present them in context—should not matter. A rose by any other name should smell just as sweet. A rational decider should focus on the choices themselves and not get sidelined by some distraction that accompanies them both. Independence from Irrelevant Alternatives, as the generic version of Independence is called, is a requirement that shows up in many theories of rational choice. A simpler version says that if you prefer A to B when choosing between them, you should still prefer A to B when choosing among them and a third alternative, C.

6. The sixth is Consistency: if you prefer A to B, then you prefer a gamble in which you have some chance at getting A, your first choice, and otherwise get B, to the certainty of settling for B. Half a chance is better than none. 

7. Interchangeability: desirability and probability trade off. If the decider prefers A to B, and prefers B to C, there must be some probability that would make her indifferent between getting B for sure, her middle choice, and having a shot at getting either A, her top choice, or settling for C. To get a feel for this, imagine the probability starting high, with a 99 percent chance of getting A and only a 1 percent chance of getting C. Those odds make the gamble sound a lot better than settling for your second choice, B. Now consider the other extreme, a 1 percent chance of getting your first choice and a 99 percent chance of getting your last one. Then it’s the other way around: the sure mediocre option beats the near certainty of having to settle for the worst. Now imagine a sequence of probabilities from almost-certainly-A to almost-certainly-C. As the odds gradually shift, do you think you’d stick with the gamble up to a certain point, then be indifferent between gambling and settling for B, then switch to the sure B? If so, you agree that Interchangeability is rational. Now here is the theorem’s payoff. To meet these criteria for rationality, the decider must assess the value of each outcome on a continuous scale of desirability, multiply by its probability, and add them up, yielding the “expected utility” of that option. (In this context, expected means “on average, in the long run,” not “anticipated,” and utility means “preferable by the lights of the decider,” not “useful” or “practical.”) The calculations need not be conscious or with numbers; they can be sensed and combined as analogue feelings. Then the decider should pick the option with the highest expected utility. That is guaranteed to make the decider rational by the seven criteria. A rational chooser is a utility maximizer, and vice versa.

Adapted from: Pinker, Steven. Rationality (pp. 175-179).

Rational Choice and Economics

Economics plays a huge role in human behavior.  People are often motivated by money and the possibility of making a profit, calculating the likely costs and benefits of any action before deciding what to do. This analysis falls into the domain of rational choice theory.

Rational choice theory was pioneered by sociologist George Homas in 1961. He laid the basic framework for exchange theory, which he grounded in assumptions drawn from behavioral psychology. During the 1960s and 1970s, other theorists (Blau, Coleman, and Cook) extended and enlarged his framework and helped to develop a more formal model of rational choice. Over the years, rational choice theorists have become increasingly mathematical. Even Marxists have come to see rational choice theory as the basis of a Marxist theory of class and exploitation.

Human Actions Are Calculated And Individualistic

Economic theories look at the ways in which the production, distribution, and consumptions of goods and services is organized through money. Rational choice theorists have argued that the same general principles can be used to understand human interactions where time, information, approval, and prestige are the resources being exchanged. According to this theory, individuals are motivated by their personal wants and goals and are driven by personal desires. Since it is not possible for individuals to attain all of the various things that they want, they must make choices related to both their goals and the means for attaining those goals. Individuals must anticipate the outcomes of alternative courses of action and calculate which action will be best for them. In the end, rational individuals choose the course of action that is likely to give them the greatest satisfaction.

One key element in rational choice theory is the belief that all action is fundamentally “rational”. This distinguishes it from other forms of theory because it denies the existence of any kinds of action other than the purely rational and calculative. It argues that all social action can be seen as rationally motivated, however much it may appear to be irrational.

Also central to all forms of rational choice theory is the assumption that complex social phenomena can be explained in terms of the individual actions that lead to that phenomena. This is called methodological individualism, which holds that the elementary unit of social life is individual human action. Thus, if we want to explain social change and social institutions, we simply need to show how they arise as the result of individual action and interactions.

Summary

• 1. Comes from Economics - People are rational, and by and large make choices in their own best self-interest. 

  2. Theory gets applied to all social and political actions, not just economics. 

  3. This type of rationality is different from the philosophical analysis of reason. 

  4. RCT is not the same as decision theory either. 

  5. As a sociological theory, it aims to explain and predict behavioral patterns of groups of people, not individuals. 

Key notions: 

• • 1. intentionality

    2. rationality

    3. how complete is the information available? 

    4. levels of risk and uncertainty - not the same. 

    5. strategic or interdependent behavior? 

Game theory

• 1. Type of rules: zero-sum, variable sum, conflict/cooperation, fixed sum games

  2. strategic form versus extended form games: number of iterations. 

  3. how many players, and how are they operating? individuals, institutions, companies, etc. 

Critique of RCT: 

• • 1. RCT develops post-hoc explanations

    2. It assumes a culturally free notion of rationality

    3. the use of history is highly restricted

    4. Does the theory recognize the difference between acting as if one is rational, and acting because one is rational.