Rational Choice Theory.What is rational in rational choice theory - Essay Example

?TOPIC What is rational in Rational Choice Theory? Critically assess its applications. RATIONAL CHOICE THEORY INTRODUCTION The Rational Choice Theoryis based on the principle, that choices which the individuals make for utilizing a particular product or service are based on the rational of maximizing the utility. The factors which derive the utility vary from individual to individual. Rational Choice theory is derived from the theoretical approach of Microeconomics. The rationalizing factor can also be called as the factor which can maximize the happiness or the satisfaction level which an individual derives after consumption. The study of this theory can also be used to determine the long term and the short term results that could be derived from the utilization or the consumption of the product (Archer and Tritter, 2000). This report will be structured to analyze the Rational Choice Theory. The complete theory will be analyzed and discussed relating to the impact of rationality on the choices which the consumers make. The theory and the concept of rationality will be critically analyzed to conclude the relevance and the application of the Rational Choice Theory. The Rational Choice Theory framework studies the societal and the economic factors of a society which determines the level of utility which the individual determines. Both the factors mentioned are pivotal in determining the level of utility which the individuals derive. The word rationality and the postulates of the Rational Choice Theory differ from each other. Rationality is defined as the sane behavior of the individual to derive maximum utility from the product that is consumed. Rationality differs from Rational Choice Theory because the act of balancing the cost and the advantage that the consumer derives from the use of that product is counted as rational even if the decision made is inappropriate (Zafirovski, 2001). Rationality classifies the decision which is considered to be sane by the complete society but the Rational Choice Theory classifies the utility on the basis of satisfaction derived by the individuals irrespective whether the decision is right or wrong. This factor has been contradicted and debated by most. This report will highlight the importance of understanding the concept of the theory to reach to a conclusion. For this the theory will be critically assessed and commented (Zafirovski, 2001). RATIONAL CHOICE THEORY AND ITS EMPHASIS The emphasis of the Rational Choice Theory is to gain maximum understanding of the human behavior. The postulates that have been proposed in the theory are very vital for deriving the concepts of economics. The use of this theory is not limited only to economics but its application can be prominently admired in disciplines like sociology, political sciences etc. where human behavior plays a very vital role. By studying the behavior of the individuals the choices which they make and their preferences for particular products can be studied (Brinton and Nee, 2001). Assumptions of Rational Choice Theory To summarize the Rational Choice Theory it can be said that the individuals try their level best to make the best buying decisions which they can under the circumstances which they are facing. The assumptions for the application of the theory are (Carling, 1991): 1. The human behavior and their action are destined for a purpose. The decision of the individual is to sight a goal that is to be achieved. 2. The decisions which the individuals make are prioritized. These set of priorities vary from individual to individual. 3. The decisions made by the individuals are on the basis of rationality. The level of preference of the products varies from individual to individual. This variation is subject to the factors like the utility derived from the consumption of the product, the cost variation of the alternates that are available, the option that is selected is considered to be the best way of maximizing the utility. 4. Social involvements of the individuals often effect the end decision which the individuals make. The decisions are often subject to the collective behavior of the individuals and the rational choices which the individuals make for the sole purpose of maximizing the utility that has been derived. Description of Rational Choice Theory There are two main concepts relevant to the Rational Choice Theory. 1. Self-Interest Standard Of Rationality This theory relates that the rational people and the decisions which they make are more cost centered. The top priority of the individuals that fall in this category is to maximize the monetary returns which they derive from the consumption of that product. The individuals that fall in this category aim at maximizing the utility for themselves (Ferrante, 2008). 2. Present-Aim Standard Of Rationality This theory emphasizes that the individuals are rational and they act with maximum efficiency to align the objective to pursue with the decision which they make at the moment. Their decisions are spontaneous and the decisions which they make are interlinked to the conditions which the present scenario portrays to them (Frederickson and Smith, 2003). Both the structure and the concepts that have been discussed in the earlier case are very important. The decisions of the individuals vary in both the cases. Sometimes the individuals give preference to cost and sometimes they prefer the varying choices from product to product. Both the concepts are incomplete and their application changes with the varying conditions (Lichbach, 2003). Popularity of Rational Choice Theory This theory is popular because of its applicative use on predicting the preferences of the customers which vary with the changing situation. By the use of this theory several predictions can be made to determine the preferences and the change in the preferences of the individuals. The choice evaluation of the choices which the individuals make can be tested by observing the results (Peter and Schmid, 2007). The reason for the popularity of the theory is the applicative description of the choices of the individuals. It has always been a priority for the producers to understand the factors which effect the buying decisions of the individuals. This understanding allows the producers in setting up a particular target market for their product (Hamilton, 1990). RATIONALITY AND ITS EMPHASIS The concept of rationality is based on the assumption that the individuals before making a decision carefully analyze and assess a situation. The end decision of the individuals is made on the basis of rationale. They choose the best option which is available for them. This shows that the individual has the potential to think in a rational way the individuals interest vary. The priority of everyone is different and these are the factors which bring a variation in the final decisions which the individuals make (Renckstorf, 2004). The interests and priorities vary from individual to individual. This is because of the varying choices. This explains the fact that everyone has their own set of interests which justifies the concept of rational buying. The level of interest an individual has for the product identifies the level of utility that will be derived from that particular decision. The individuals very keenly make the choices and those choices increases the level of utilities which they derive. The concept of rationality is directly linked to the individual selecting a choice which best suits their particular needs. The results of the choices made cannot be predetermined but the objective of the decision is to increase the utility (Hastie and Dawes, 2009). Emphasis The emphasis of rationality is that the decisions which the individuals make depend on a lot of factors. These factors can be the internal of the external factors both. In certain cases the wants and the desires of the individuals vary with the changing time. The choices which the individuals make cannot be predetermined. This is because the decision and the choices of the individuals are all detrimental to the varying internal and the external factors. The change in the external factors could change the decision which the individuals made. The people and their decisions were controlled by the environment they belonged too. The impact of the social influence on the decisions which the individuals make is very high (Heath, 1976). It can be derived from the discussion that the rationality of an individual is affected by various internal and external factors of the society. The impact of the societal factors on the decisions of the individuals is very high. It can be said that the societal factors have an impact in dominating the decisions of the individuals. The focus of every sane and rational person is to maximize the utility which is derived from using a product or service. The factors which lead to the maximization of the utility vary with the changing individual (Jackson and Sorensen, 2007). CRITICAL ASSESSMENT Application of Rational Choice Theory The rational choice theory can be applied in all the places where making a choice is required. The decision making process includes the application of rationality. The application of the Rational Choice Theory can be seen in the areas of Economics, Sociology, Political Sciences, etc. The impact of the theory in these areas emphasize on rationality in the making of the choices. These choices which the individuals make determine their preferences (Valier, 2002). The impact of Rational Choice Theory on the concepts of economics is primarily significant. The application of this theory is primary for the individual in several phases. The business owners should consider adapting to the theory of rational choice. This is essential for the interpretation of the future decisions of the individuals relating to spending. The application of this theory helps in assessing the social and the economic decision which the individuals make. The concept of rationality is used to dominate the decisions of the individuals. The application of the word rationality in the Rational Choice Theory differs from its lingual meaning (Lenoble and Maesschalck, 2003). The application of Rational Choice Theory is everywhere, especially where the social or the societal issues are concerned. A few examples of such issues are suicide, auto-safety issues, addiction, racial profiling, etc. These are a few social issues where the theory can be properly applied. EXAMPLE # 1: Shirking An example to explain the application of Rational Choice Theory the example of Shirking will be discussed. Shirking is the non participation of the employees. In this process the employee fails to place all his efforts in the tasks which he performs. This case will be discussed by analyzing a firm and its employees. The firm is on the quest of profit maximization. It is aiming to reduce all the additional costs which are being incurred. The inefficiencies of the employees are adding additional cost to the employer. The income of the employee is giving him the incentive to shirk from his responsibilities and enjoy a leisure time. The firms can only monitor the employees to an extent. To understand this and to maximize the efficiency the firm may implement the policies which may be necessary for them. For this purpose the firms may share the profits with the employees at a certain percentage to motivate them and to improve the productivity of the firms (Green, 2002). These choices which are available to the employer of either incurring cost in monitoring the employees or offering to them incentives to increase their productivity will improve the productivity of the company. The measurement of the effectiveness of the theory to be applied is called as the Rational Choice Theory. EXAMPLE # 2: Consumer Buying Behavior This theory can also be used to predict the consumption buying behavior of the consumers. The competition in the industry is getting fiercer day by day. The competitors are constantly trying to analyze the factors which determine the preferences of the employees. The Rational Choice theory is pillared on the principles of understanding the consumptions and the variables which impact consumption. The consumption of the individuals can be effected by the income which they earn, the applicable interest and inflation rate, the stock prices and the investment position in the markets, etc. The analysis of the change in these factors can be seen in the past and the present trends to speculate and predict the changes in the consumer buying trends (Green, 2002). The Rational Choice Theory explains that if the income of an individual will change then the trend of his buying behavior will also change. Same can be observed if there is a change in the interest rates or the inflation rate. The valuation and the devaluation of the currency show a rise in the inflation rate. The rise in the inflation rate reduces the buying power of the individual. These changes interpret the change in the consumers and their buying preferences. EXAMPLE # 3: Lehman Brother’s The impact of the Rational Choice Theory has been observed in several cases. The impact on the collapse of the Lehman Brother’s was significantly because of the wrong choices which they had made. The financial services firm filed a bankruptcy suit on September 15, 2008. On collapse of the mortgage market in 2008 the firm underwent a lot of losses. It had a major stake invested in the mortgage markets (Mamudi, 2008). This event can be related to the Rational Choice Theory because of the wrong choice which the firm made it faced subsequent losses. EXAMPLE # 4: Challenges for the Banks and Financial Institutes Due to the uncertain economic conditions and the fluctuating interest and inflation rates most of the banks faced a lot of challenges. Due to these challenges the Universal Bank also suffered a lot of losses. Universal Bank is just a name amongst many Banks and Financial institutes. Due to excess diversification and the holding of big positions in the markets Universal Bank faced too many problems (Jain, 2013). Analysis of these issues again concludes that if the choices which were made were more rational and had been made after proper calculations the problems may have been avoided. The Rational Choice Theory shows that the implementation of choices after proper analysis may reduce the chances of losses. CONCLUSION Amongst many theories, the Rational Choice Theory is not applicable universally. This theory is a perfect tool designed for the social analysts to understand the behavior of the individuals and the factors which explain the reasons for the varying preferences of the individuals. The application of the tools and the techniques are for properly analyzing and bringing to light the results of those analyses. Rational Choice Theory applies to analyzing the preferences of the individuals and the decisions which maximize their utility. The mere aim and goal of this report is to understand the implications of the Rational Choice Theory. This report consists of a detailed explanation of the rationality behind the theory and its application on the choices and preferences of the individuals. This theory specifies that the decision of the individuals is determined by the varying societal factors. Due to the implication of the factors the decisions which the individuals take vary. The preferences and choices of everyone are different. There have been many criticisms on the theory. This is because it only highlights the facts which have already been identified (Lovett, 2006). This theory is useful for the analysts who wish to analyze the detrimental factors of the individuals and the decisions which they make. It is assumed that the intention in making the purchase is rational and that the consumer is centered to maximize his satisfaction level. The theory emphasizes the social impact which effects the decision of the individuals and the impact of taste on the preferences of the consumers. This whole report suggests the application of the theory and the need of differentiating the concept of rationality and Rational choice Theory. The theory relies on assumption and the factors included cannot be tested. The lack of testing of the theory makes it difficult to speculate the factors which affect the preferences of the individuals. LIST OF REFERENCES Archer, M., and Tritter, J. (2000). Rational Choice Theory: Resisting Colonization. London: Routledge. Brinton, M. and Nee, V. (2001). The New Institutionalism in Sociology. Palo Alto: Stanford University Press. Carling, A. (1991). Social Division. New York: Verso. Ferrante, J. (2008). Sociology: A global perspective. Thompson Wadsworth Frederickson, H., and Smith, K. (2003). The Public Administration Theory Primer. New York: Westview Press. Green, S. (2002). Rational Choice Theory: an overview. Prepared for Baylor University Faculty Development Seminar on Rational Choice Theory. Hamilton, P. (1990). Emile Durkheim: Critical Assessments. London: Routledge. Hastie, R., and Dawes, R. (2009). Rational Choice in an Uncertain World. New York: Sage. Heath, A. (1976). Rational Choice &Social Exchange: A Critique of Exchange Theory. New York: CUP Archive. Jackson, R., and Sorensen, G. (2007). Introduction to International Relations: Theories and Approaches. London: Oxford University Press. Jain, A. (2013). Challenges and opportunities for Universal Banks. Available from https://www.db.com/en/media/Deutsche-Bank-Anshu-Jain-CFS-Speech-Global-universal-local-bank.pdf [Accessed 15 June 2013] Lenoble, J., and Maesschalck, M. (2003).Toward a Theory of Governance: The Action of Norms. London: Kluwer Law International. Lichbach, M. (2003). Is Rational Choice Theory all of Social Science? Ann Arbor: University of Michigan Press. Lovett, F. (2006). Rational Choice Theory and explanation. Rationality and Society, vol. 18, no. 2, pp. 237-272 Mamudi, S. (2008). Lehman folds with record $613 billion debt. Available from http://www.marketwatch.com/story/lehman-folds-with-record-613-billion-debt?siteid=rss [Accessed 15 June 2013] Peter, F., and Schmid, H. (2007). Rationality and Commitment. London: Oxford University Press. Renckstorf, K. (2004). Action Theory and Communication Research. London: Walter de Gruyter. Valier, C. (2002). Theories of Crime and Punishment. Pearson Education Limited. Zafirovski, M. (2001). Exchange, Action, and Social Structure: Elements of Economic Sociology. New York: Greenwood Publishing Group. Read More