This document covers all parts of the subject “rational choice theory”. Various theories, ideas and models that fall within the field of “rational choice” are discussed.
In this document, every aspect of the course “rational choice” is included. It focuses on different theories, ide...
Rationality and preferences
RC (rational choice) is more an approach than one theory:
o Social choice theory
o Public choice theory
o Expected utility theory
o Game theory
o Smaller theories
RC uses a deductive method = theory predictions experiment
RC is based on two main assumptions:
o 1: methodological individualism (about people as individuals)
o 2: rational behaviour (= utility maximalization)
Methodological individualism
o Unit of analysis is the individual person even group actions are explained by actions of
individuals
o Other than theories that focus on groups
o Focus of RC is on individuals and individual actors
o Institutions can be explained by the individuals in it
o Society is the sum of individuals
o Society does not shape individuals, individuals are shaped independently of the social structure
o Every analysis must begin with the individuals, deal with individual choices and experiences,
with collectives formed as aggregates
o = bottum up
Rational behaviour = utility maximalization
o Rationality individuals have goals or desires; individuals act according to those goals and
desires = preferences (goals and desires = preferences)
o If you don’t act according to your preferences, you are irrational + if you act according to those
preferences, you are rational
o Where do preferences come from? survival, reproduction, socially acquired, etc.
o RC does not care about where preferences come from and why people want certain things
o Preferences of individuals are given, and they don’t change much (on short term)
o We don’t know the preferences of others, just our own, however we make assumptions about
the preferences of others
Self-interest vs. selfish
o If an individual has preferences and acts according to them, we call the individual rational and
self-interested
o People pursue what they find important, this can include empathy for friends and family,
animals, environment, etc.
o Self-interest does not equal selfish, it can be, but doesn’t have to be
Complication of rationality thick vs. thin
o Thin version we do not make any assumptions about an individual’s goal, we only know
they have goals
o Thick version we make more explicit assumptions about the goals of individuals
o Some theories use thin version, some use thick version
To put it more formal
o i = term for individual = one person
o x, y, z = preferences that individual has (= options for preferences) = choice set
o x Pi y means i prefers option x over y
o x Ii y means individual is indifferent between option x and y
You chose the action that leads to the most preferred option
To be able to order your preferences two assumptions are of importance:
o 1: comparability/completeness
o 2: transitivity
Comparability/completeness
o A rational choice must be complete
o All alternatives in the choice set must be comparable in terms of preferences
Transitivity
o A strict preference relation is said to be transitive if for any of the possibilities:
x Pi y Pi z = x Pi y + x Pi z rational
, Problems with completeness: if the comparison does not make sense for the individual
Problems with transitivity
o Requires consistency
o It gets complicated when stakes are very low and/or uncertainty is very high
3 options is 3 options in formula, so x Pi y Pi z not x Pi y and y Pi z, otherwise you can’t know if the
person is rational. You need to know the complete preferences ordering = completeness
Check for “circle” in preferences if so = problem with transitivity
Rational decision often involves cost-benefit analysis
A rational individua will pursue aa goal if the benefits out weight the costs
Cost and benefits can change, preferences not (on short term)
Miscalculations of costs and benefits can happen
Expected utility theory
Individuals rarely get to choose outcomes directly, often you can only choose a course of action you
believe leads to the most preferred outcome
A rational individual chooses an action s/he believes will lead to the most preferred outcome
o Belief = a probability statement relating the effectiveness of a specific action (or instrument)
for various outcomes
o They come from different sources and can change
Relationship: action and outcomes
o 3 options: certainty, risk, and uncertainty
o Certainty = the relationship between action and outcome is clear
o Risk = the relationship between action and outcome is unclear, but it is possible to link its
probabilities
o Uncertainty = the relationship between action and outcome is imprecise and entirely unclear
o Making a rational decision on the conditions of risk and uncertainty is difficult but not always
impossible, for this we need to work with utility
Risk and utility
o Utility = the “benefit” the individual derives from the outcome
o There are two kinds of utility
Ordinal utility
Cardinal utility
Ordinal utility
o A rational preference ordering means that we can order outcomes from most preferred to least
preferred and it is logically consistent (complete and transitive)
o We can therefore assign a number to each outcome to denote its rank in the individual’s
preference order, this is ordinal utility
o Ordinal utility only captures the ranking of preferences
o However, problem:
The results of some actions may be risky or uncertain
Furthermore, actions often entail costs
o We need to know more than the ordinal utility of preference orderings
Cardinal utility
o Cardinal utility tells us how much an individual prefers one outcome to another
o Cardinal utility expresses the intensity of preferences for a given outcome
o This intensity is relative to:
1: the individual
2: the set of outcomes
o We cannot compare the cardinal utilities of two people
o We cannot make interpersonal comparisons
Important a preference relation can be represented by a utility function only if it is rational
Cardinal and ordinal utility can be found in many political settings, most prominent voting
Expected utility
o Individuals make choices under conditions of uncertainty
o We can assign probabilities to outcomes
o Individuals’ preference ordering can be ranked in terms of cardinal utility
o Using probabilities and cardinal utility, we can treat actions as lotteries en derive Expected
Utility (EU) of each course of action (lottery)
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