Rational Choice Theory

Rational choice theory states that individuals rely on rational calculations to achieve outcomes that are in line with their personal objectives. These decisions provide people with the greatest benefit or satisfaction — given the choices available — and are also in their highest self-interest. Most mainstream academic assumptions and theories are based on rational choice theory.

Rational choice theory assumes that all people try to actively maximize their advantage in any situation and therefore consistently try to minimize their losses. In other words, the notion that since rational calculus dictates human behavior, rationality will be the driving force when making a choice whose outcome will be maximizing the individual's pleasure or profit.

Rational choice theory also stipulates that all complex social phenomena are driven by individual human actions. Therefore, an economist, by studying the rational decisions of the individual, can better understand the behavior of society as a whole.

A common misconception is the attribution of selfishness to this theory. While rationality, specifically the idea that individuals acting in their self interest is logical, is consistent with the selfish narrative, it can also be compatible with altruism. An individual may choose to be charitable as it might make them feel better about themselves.

However, many economists do not believe in rational choice theory. Dissenters have pointed out that individuals do not always make rational utility-maximizing decisions. For example, the field of behavioral economics is based on the idea that individuals often make irrational decisions and explores why they do so.

Additionally, Nobel laureate Herbert Simon proposed the theory of bounded rationality, which says that people are not always able to obtain all the information they would need to make the best possible decision. Further, economist Richard Thaler's idea of mental accounting shows how people behave irrationally by placing greater value on some dollars than others, even though all dollars have the same value. They might drive to another store to save $10 on a $20 purchase, but they would not drive to another store to save $10 on a $1,000 purchase.

While rational choice theory is clean and easy to understand, it is often contradicted in the real world. For example, political factions that were in favor of the Brexit vote held on June 24, 2016, used promotional campaigns that were based on emotion rather than rational analysis. These campaigns led to the semi-shocking and unexpected result of the vote, when the United Kingdom officially decided to leave the European Union. The financial markets then responded in kind with shock, wildly increasing short-term volatility, as measured by the CBOE Volatility Index (VIX).

Further, research conducted by Christopher Simms of Dalhousie University in Halifax, Canada, shows that when people are anxious, they fail to make rational decisions. Stressors that produce anxiety have been shown to actually suppress parts of the brain that aid in rational decision-making.