RATIONAL CHOICE

MOST ESSENTIAL LEARNING COMPETENCIES

At the end of the lesson, the learner must be able to:

• analyze the basic concepts and

principles of the major social science
ideas: b. Rational Choice
 CONTENT STANDARD

• The students demonstrate an

understanding of key concepts and
approaches in the Social Sciences
 PERFORMANCE STANDARD

The learners shall be able to:

• evaluate the strengths and weaknesses of
the approach.
LEARNING OBJECTIVES
At the end of the lesson, the learner must be able to:

• Identify the strengths and weaknesses of Rational

choice.
• Analyze the concept and principle of Rational
choice.
• Assess personal and social experiences on the
concept of Rational Choice
PREMISE OF RATIONAL CHOICE

• The key premise of rational choice theory is that people

don’t randomly select products off the shelf.
• Rather, they use a logical decision-making process that
takes into account the costs and benefits of various
options, weighing the options against each other.
What Are the Main Goals of Rational Choice
Theory?
• The main goal of rational choice theory is to explain why
individuals and larger groups make certain choices,
based on specific costs and rewards.
• According to rational choice theory, individuals use their
self-interests to make choices that will provide them with
the greatest benefit.
• People weigh their options and make the choice they
think will serve them best.
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lovers.
What is Rational Choice?

• The Rational Choice • Individuals rationalize

Theory explains that their situations by
human action and processing between the
most beneficial choices
behavior are
and the lesser
products of choice.
individual cost.
What is Rational Choice?
• In the Rational Choice
Theory, Cost-Benefit
Analysis is always
performed in every given
situation and is considered
an instinctual response of
every human.
• Cost is something
disadvantageous to or
what is lost by an
individual, while benefit is
that which is gained by or
is advantageous to the
individual after making the
choice.
Examples of Rational Choice Theory
• According to rational choice theory, rational investors are those investors
that will quickly buy any stocks that are priced too low and short-sell any
stocks that are priced too high.
• An example of a rational consumer would be a person choosing between
two cars. Car B is cheaper than Car A, so the consumer purchases Car B.
• While rational choice theory is logical 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 23, 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—the United Kingdom officially decided to leave the European Union.
What Is Rational Choice Theory in International
Relations?
• States, intergovernmental organizations,
nongovernmental organizations, and multinational
corporations are all made up of human beings.
• In order to understand the actions of these entities, we
must understand the behavior of the humans running
them.
• Rational choice theory helps to explain how leaders and
other important decision-makers of organizations and
institutions make decisions. Rational choice theory can
also attempt to predict the future actions of these actors.
Basic assumptions of Rational Choice Theory:

1. Individuals act purely on 3. Preferences are transitive

self- interest
2. Individuals understand
their interests enough to
rationally categorize them
according to what they most
prefer.
in nature. This means that
choices have a hierarchical
order and that the highest
preference will always be
favored.
Key Concepts in Rational Choice Theory:

• Social Consequence of Scarcity-based Decision

Humanity’s unlimited wants and perpetual desires drove
civilizations to either their prominence or destruction.
• With natural resources being finite and the requirements
of human ambition unending, the most rational choice is
to conserve the limited resources we have, and share this
with each other.
• However, the problem is that individuals only seek self-
interest and would end up deciding what benefits them
the most.
Who Founded Rational Choice Theory?

• Adam Smith, who proposed the

idea of an "invisible hand" moving
free-market economies in the mid-
1770s, is usually credited as the
father of rational choice theory.
• Smith discusses the invisible hand
theory in his book “An Inquiry into
the Nature and Causes of the
Wealth of Nations,” which was
published in 1776.
Adam Smith
Self-Interest and the Invisible Hand

• The invisible hand itself is a metaphor for the unseen

forces that influence a free market economy.
• First and foremost, the invisible hand theory assumes
self-interest.
• Both this theory and further developments in the rational
choice theory refute any negative misconceptions
associated with self-interest.
• Instead, these concepts suggest that rational actors
acting with their own self-interest in mind can actually
create benefits for the economy at large.
Self-Interest and the Invisible Hand
• According to the invisible hand theory, individuals driven by self-
interest and rationality will make decisions that lead to positive
benefits for the whole economy.
• Through the freedom of production, as well as consumption, the
best interests of society are fulfilled.
• The constant interplay of individual pressures on market supply and
demand causes the natural movement of prices and the flow of
trade.
• Economists who believe in the invisible hand theory lobby for less
government intervention and more free-market exchange
opportunities.
 Important Theorists:
-He was an English economist who applied the
principles of Rational Choice Theory in Political
Economy. William Stanley Jevons
-Jevons was one of the first to advance the Theory
of Marginal Utility, which sought application in
determining and understanding consumer
behavior.
-Jevons also identified the concept called Equation
of Change, which says that in order to get the
most utility, the ratio of marginal utility must be
equal to the price of the commodity.
-Marginal utility, in this sense, points to the line
wherein the value for a certain object is still within
satisfactory levels.
 What Is Marginal Utility?
• Marginal utility is the added
satisfaction that a consumer
gets from having one more
unit of a good or service.
• The concept of marginal
utility is used by economists
to determine how much of
an item consumers are
willing to purchase.
• Positive marginal utility
occurs when the
consumption of an additional
item increases the total utility.
• On the other hand, negative
marginal utility occurs when
the consumption of one
more unit decreases the
overall utility.
Types of Marginal Utility;

• Positive marginal utility occurs when having more of an item

brings additional happiness.
• Suppose you like eating a slice of cake, but a second slice would
bring you some extra joy. Then, your marginal utility from
consuming cake is positive.
• Zero marginal utility is what happens when consuming more of
an item brings no extra measure of satisfaction.
• For example, you might feel fairly full after two slices of cake and
wouldn't really feel any better after having a third slice. In this case,
your marginal utility from eating cake is zero.
• Negative marginal utility is where you have too much of
an item, so consuming more is actually harmful.
• For instance, the fourth slice of cake might even make
you sick after eating three pieces of cake.
The Paradox

• The concept of marginal utility was developed by

economists who were attempting to explain the
economic reality of price, which they believed was
driven by a product's utility.
• In the 18th century, economist Adam Smith discussed
what is known as "the paradox of water and
diamonds." This paradox states that water has far
less value than diamonds, even though water is vital
to human life
• This disparity intrigued economists and philosophers
around the world. In the 1870s, three economists—
William Stanley Jevons, Carl Menger, and Leon
Walras—each independently came to the conclusion that
marginal utility was the answer to the water and diamonds
paradox. In his book, The Theory of Political Economy,
Jevons explained that economic decisions are made
based on "final" (marginal) utility rather than total
utility.
Example of Marginal Utility

• David has four gallons of milk, then decides to purchase a

fifth gallon. Meanwhile, Kevin has six gallons of milk and
likewise chooses to buy an additional gallon.
• David benefits from not having to go to the store again for
a few days, so his marginal utility is still positive. On the
other hand, Kevin may have purchased more milk than he
can reasonably consume, meaning his marginal utility
might be zero.
• The chief takeaway from this scenario is that the marginal
utility of a buyer who acquires more and more of a
product steadily declines.
• Eventually, there is no additional consumer need for the
product in many cases. At that point, the marginal utility of
the next unit equals zero and consumption ends.
Gary Becker
He was an American Economist who expanded
the study of Economics to the realm of
sociology and the other social sciences.
• Suggesting that human behavior is subject to
economic analysis, Becker argued that
individuals act to maximize their own welfare,
thereby taking the scope of Economics
beyond mere calculation of financial gains.
• Like the other thinkers of Rational Choice
Theory, Becker ascribes to the principles that
humans behave according to their
“perceived values and preferences.” Gary Becker
What Is Perceived Value?
• In marketing terminology,
perceived value is the
customers' evaluation of
the merits of a product or
service, and its ability to
meet their needs and
expectations, especially in
comparison with its peers.
• Marketing professionals try
to influence consumers'
perceived value of a
product by describing the
attributes that make it
superior to the competition.
Types of Perceived Utility Value

• Marketers who want to influence the perceived value of a

product define its attributes in terms of its utility, or the
extra benefits and values that the customer expects to get
in using it. The perceived utility of many products and
services may differ widely even among similar or virtually
identical products.

• There are five types of utilities that companies aim to

create through marketing campaigns for products:
Understanding Perceived Value

• Perceived value comes down to the price the public is willing to

pay for a good or service. Even a snap decision made in a store
aisle involves an analysis of a product's ability to fulfill a need and
provide satisfaction compared to other products under different
brand names.
• The work of the marketing professional is to enhance the
perceived value of the brand they are selling.
• The pricing of products takes perceived value into consideration.
In some cases, the price of a product or service may have more to
do with its emotional appeal than with the actual cost of
production.
 There are five types of utilities that companies aim to create
through marketing campaigns for products:
1. Form utility is the aesthetic appeal of the physical design of a product. Even a
utilitarian product like a frying pan can increase in perceived value because of its
appealing design.
2. Task utility is the value attached to a service that saves the customer time, effort, or
money. Car detailing shops and laundry services offer utility value.
3. Time utility refers to the ease of access to a service or product, such as 24-hour
service compared to 9-to-5 hours.
4. Place utility is the convenience of the location, like a fast-food outlet that's around
the corner compared to a restaurant that's 20 miles away.
5. Possession utility refers to the ease of purchasing the product. A department store
that features online ordering, home delivery, or in-store pickup is aiming for
possession utility.
Special Considerations of Perceived Values and
Preference
• A company's brand is meant to communicate a set of
expectations associated with its products or services.
• That's why a well-established brand can command a
higher price than its generic equivalents.
• Advil and Motrin both contain ibuprofen, but both brands
are priced higher than generic ibuprofen.
Special Considerations of Perceived Values and
Preference
• Luxury goods, however, carry the
perception of value to another level
with the addition of prestige. The
highest value of luxury goods is not
associated with their utility but with
the prestige that owning and using
it entails.
• The perceived value of a Rolex
watch is not based on its
functionality but with its image as a
mark of personal success and
refined taste.
• At the opposite end of the
scale, some brands are
marketed as smart
bargains.
• The perceived value of a
product may be its low
price in comparison with
competitors of equal
quality.
Pros of Rational Choice Theory

• Helpful in explaining individual and collective

behaviors
• All theories attempt to give meaning to the things
we observe in the world.
• Can help to explain behavior that seems irrational
Cons of Rational Choice Theory

• Individuals do not always make rational decisions.

• In reality, people are often moved by external
factors that are not rational, such as emotions.
• Individuals do not have perfect access to the
information they would need to make the most
rational decision every time.
• People value some dollars more than others.
The Strengths of Rational Choice Theory

• One of the strengths of rational choice theory is the

versatility of its application. It can be applied to many
different disciplines and areas of study.
• It also makes reasonable assumptions and compelling
logic. The theory also encourages individuals to make
sound economic decisions.
• By making sound economic decisions, it is possible for an
individual to acquire more tools that will allow them to
further maximize their preferences in the future.
Weakness of Rational Choice Theory

• A limitation of rational choice theory is that it focuses on

individual action. While one could say that individual
action drives large social structures, some rational choice
theory critics argue the theory is too limited in its
explanation.
• Another weakness of rational choice theory is that it
doesn’t account for intuitive reasoning or instinct. For
decisions that must be made in an instant, such as
decisions that influence survival, there may not be time to
weigh the costs and benefits.
REFLECTIVE LEARNING

• Analysis and application of rational choice in

terms of your career path decision side by
side with your economic status(life situation)
in relation to the demands(opportunities) of
the world.
INSIGHT ESSAYS ACTIVITY- Rubrics: Depth of analysis- 2
Organization of ideas/thought-2
Grammar and spelling- 1
Total points- 5 qawereAsw

1. According to the Rational Choice Theory, how do people make decisions in terms of
their values and preference?
2. What Are the Strengths and weakness of Rational Choice Theory?
3. What Is Rational Choice Theory in International Relations?

4. Aside from your choice of which track to enroll in, cite an instance in your daily life
wherein you applied rationality in making a final choice or decision. Elaborate your answer
by giving not only the choice and options available but also the reason for your choice.

5. Explain the invisible hand of Adam Smith with your observation or experience in buying
products in different institution either in the public market or in the mall.