Rational Choice Theory An Overview
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Rational Choice Theory An Overview
Rational Choice Theory: An OverviewbySteven L. GreenProfessor of Economics and Statistics Chair, Department of Economics Baylor UniversityPrepared for Rational Choice Theory An Overviewr the Baylor University Faculty Development Seminar on Rational Choice Theory-37377© 2002. Steven L. Green-2-It has been said that democracy is the worst form of government except all the others that have been tried.-Winston ChurchillIt seems easy to accept that rationality involves many features th Rational Choice Theory An Overviewat cannot be summarized in terms of some straightforward formula, such as binary consistency. But this recognition does not immediately lead to alternRational Choice Theory An Overview
ative characterizations that might be regarded as satisfactory, even though the inadequacies of the traditional assumptions of rational behaviour stanRational Choice Theory: An OverviewbySteven L. GreenProfessor of Economics and Statistics Chair, Department of Economics Baylor UniversityPrepared for Rational Choice Theory An Overviewaviour... that can be found in the traditional economic literature, both because the identified deficiencies have been seen as calling for rather divergent remedies, and also because there is little hope of finding an alternative assumption structure that will be as simple and usable as the traditio Rational Choice Theory An Overviewnal assumptions of self-interest maximization, or of consistency of choice.- Amartya Sen (1990, p. 206)1. IntroductionRational Choice Theory is an appRational Choice Theory An Overview
roach used by social scientists to understand human behavior. The approach has long been the dominant paradigm in economics, but in recent decades it Rational Choice Theory: An OverviewbySteven L. GreenProfessor of Economics and Statistics Chair, Department of Economics Baylor UniversityPrepared for Rational Choice Theory An Overvieweyond conventional economic issues is discussed by Becker (1976), Radnitzky and Bernholz (1987), Hogarth and Reder (1987). Swedberg (1990), and Green and Shapiro (1996).The main purpose of this paper is to provide an overview of rational choice theory for the non-specialist. I first outline the basi Rational Choice Theory An Overviewc assumptions of the rational choice approach, then I provide several examples of its use. I have chosen my examples to illustrate how widely the ratiRational Choice Theory An Overview
onal choice method has been applied.-3-In the paper I also discuss some ideas as to why the rational choice approach has become more prevalent in manyRational Choice Theory: An OverviewbySteven L. GreenProfessor of Economics and Statistics Chair, Department of Economics Baylor UniversityPrepared for Rational Choice Theory An Overviewrgue that these opportunities ar e the result primarily of the mathematical nature of the approach.T then consider several issues raised by rational choice theory. First, I compare the limited meaning of “rationality" in rational choice dieory with the more general definitions of the term use by phi Rational Choice Theory An Overviewlosophers. Second, I describe some of the main critic isms that have been levied against the rational choice approach. Third, I consider the limitatioRational Choice Theory An Overview
ns of rational choice models as guides to public policy. Fourth, 1 review some Christian perspectives on the rational choice appraoch.I end the paper Rational Choice Theory: An OverviewbySteven L. GreenProfessor of Economics and Statistics Chair, Department of Economics Baylor UniversityPrepared for Rational Choice Theory An Overviewder. I apologize for the length of this paper. The British publisher Lord Beaverbrook once apologized to a friend for sending a five-page letter, saying he did not have lime to write a one-page letter. I have the same sentiment here.The caveat is that my discussion of the rational choice theory in t Rational Choice Theory An Overviewhis paper is necessarily simplistic, so the reader should not take it as definitive. If some element of the theory seems suspec t in some way, there wRational Choice Theory An Overview
ill nearly always be an advanced version of the theory published somewhere that is more subtle and nuanced. Most statements in tills paper arc subjectRational Choice Theory: An OverviewbySteven L. GreenProfessor of Economics and Statistics Chair, Department of Economics Baylor UniversityPrepared for Rational Choice Theory An Overviewder some sense of the overall flavor of die rational choice approach.-4-2. Basic Assumptions about Choice DeterminationRational Choice Theory generally begins with consideration of the choice behavior of one or more individual decision-making units - which in basic economics are most often consumers Rational Choice Theory An Overview and/or firms. The rational choice theorist often presumes that the individual decisionmaking unit in question is “typical" or “representative" of somRational Choice Theory An Overview
e larger group such as buyers or sellers in a particular market. Once individual behavior is established, the analysis generally moves on to examine hRational Choice Theory: An OverviewbySteven L. GreenProfessor of Economics and Statistics Chair, Department of Economics Baylor UniversityPrepared for Rational Choice Theory An Overview description of (1) the desired purchases of tomatoes by buyers, (ii) the desired production and sales of tomatoes by sellers, and (iii) how these desired purchases and desired sales interact to determine the price and quantity sold of tomatoes in the market. The typical tomato buyer is faced with t Rational Choice Theory An Overviewhe problem of how much of his income (or more narrowly, his food budget) to spend on tomatoes as opposed to some other good or service. The typical toRational Choice Theory An Overview
mato seller is faced with the problem of how many tomatoes to produce and what price to charge for them.Exactly how does the buyer choose how much of Rational Choice Theory: An OverviewbySteven L. GreenProfessor of Economics and Statistics Chair, Department of Economics Baylor UniversityPrepared for Rational Choice Theory An Overviewof answers to these questions. They might choose based on custom or habit, with current decisions simply a continuation of what has been done (for whatever reason) in the past. The decisions might be made randomly. In contrast, the rational choice approach to this problem is based on the fundamental Rational Choice Theory An Overview premise that the choices made by buyers and sellers are the choices that best help them achieve their objectives, given all relevant factors-5-that aRational Choice Theory An Overview
re beyond their control. The basic idea behind rational choice theory is that people do their best under prevailing circumstances.What is meant, exactRational Choice Theory: An OverviewbySteven L. GreenProfessor of Economics and Statistics Chair, Department of Economics Baylor UniversityPrepared for Rational Choice Theory An Overviewce theory of consumer behavior is based on the following axioms regarding consumer preferences:2-1The consumer faces a known set of alternative choices.-2For any pair of alternatives (A and B, say), the consumer either prefers A to B, prefers B to A, or is indifferent between A and B. This is the ax Rational Choice Theory An Overviewiom of completeness.-3These preferences are transitive. That is, if a consumer prefers A to B and B to c, then she necessarily prefers A to c. If sheRational Choice Theory An Overview
is indifferent between A and B, and indifferent between B and c, then she is necessarily indifferent between A and c.-4The consumer will choose the moRational Choice Theory: An OverviewbySteven L. GreenProfessor of Economics and Statistics Chair, Department of Economics Baylor UniversityPrepared for Rational Choice Theory An Overview of those alternatives - with the specific choice from among them remaining indeterminate.1The analysis of firm behavior has many similarities with the analysis of consumer behavior. Firms are generally assumed to make choices with (he Idea of maximizing profits or (he market value of the firm (as r Rational Choice Theory An Overvieweflected in the firm’s stock price If it is a corporation).Rational Choice Theory: An OverviewbySteven L. GreenProfessor of Economics and Statistics Chair, Department of Economics Baylor UniversityPrepared forRational Choice Theory: An OverviewbySteven L. GreenProfessor of Economics and Statistics Chair, Department of Economics Baylor UniversityPrepared forGọi ngay
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