Challenges to Rational Choice Theory

The fundemental assumption regarding human behavior, upon which the whole edifice of rational choice theory (RCT) rests is that human beings are rational; specifically, it means that they act in order to maximize their self-interest by “maximizing expected utility”. The construction above takes into account our preferences (utility) and the fact that the link between our actions and outcomes are rarely certain, but that we are able to adequately estimate (beliefs) the likelihood of achieving a specific goal given an accompanying action.

In the example of Lebron James I posted earlier, he has a generally good idea of his preferences (he prefers–other things equal–to hit a 3-pointer over a field goal or a free throw) and his beliefs (he knows his stats regarding his 3-point shooting percentage, his field goal, and free throw percentages as well). Given his beliefs and preferences, Lebron can easily act–and generally does–in an instrumentally rational manner.

How valid, though, is the assumption that human beings do act in an instrumentally rational manner? In other words, do individuals always maximize their expected utility? The short answer is no. Some political scientists believe that political culture often acts to mitigate instrumentally rational behavior. [We’ll discuss this in class on Tuesday.] Whole sub-disciplines in behavioral psychology and behavioral economics can point to copious amounts of research data demonstrating the lack of rationality in human beings, often in fairly simple situations. Michael Sherman asks “why people believe weird [i.e., irrational] things about money”:

Would you rather earn $50,000 a year while other people make $25,000, or would you rather earn $100,000 a year while other people get $250,000? Assume for the moment that prices of goods and services will stay the same.

Surprisingly — stunningly, in fact — research shows that the majority of people select the first option; they would rather make twice as much as others even if that meant earning half as much as they could otherwise have. How irrational is that?

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