Introduction to Game Theory/Theory of rational choice

Rational choice theory assumes human behaviour is guided by instrumental reason. Accordingly, individuals always choose what they believe to be the best means to achieve their given ends. Thus, they are normally regarded as maximizing utility, the "currency" for everything they cherish (for example: money, a long life, moral standards). As the modern formulation of much older descriptions of rational behaviour, Rational choice theory belongs to the foundational theory of economics. Over the last decades it has also become increasingly prevalent in other social sciences.

Rational choice theory adopts methodological individualism; it conceives of social situations or collective behaviors as the exclusive result of individual actions. However, rational choice theory is not only applied to individual human actors. Often, the same pursuit of cherished values is assumed for collective entities, for example corporations or national governments.

For a choice to be considered "rational", a number of assumptions are ordinarily stated:

• In economics, the key concept is preference: a preference ranking for a set of items is considered rational if preferences are 1) complete (every item is ranked) and 2) transitive (if A is preferred to B, and B to C, then A is preferred to C). Thus, the decision-maker is able to compare all of the alternatives, and all comparisons are consistent.
• If uncertainty is involved, then the independence axiom is often assumed in addition to rational preferences.
• If decision-making over time is involved, time consistency is generally assumed as well.
• Finally, the rational decision-maker must always choose the item he or she prefers.

Often, to simplify calculation and ease prediction, some rather unrealistic assumptions are made about the world. These can include:

• An individual has precise information about exactly what will occur under any choice made. (Alternatively, an individual has a reliable probability distribution describing what will happen under any choice made.)
• An individual has the cognitive ability to weigh every choice against every other choice.
• An individual is aware of all possible choices.

Sometimes these assumptions have the status of "as if" propositions—statements that are not meant to be literally true but that predict the behaviors individuals are believed to exhibit.

Both the assumptions and the behavioral predictions of ""rational choice theory"" have sparked criticism from a number of camps. Some people have developed models of bounded rationality, which hope to be more psychologically plausible without completely abandoning the idea that reason underlies decision-making processes. For a long time, a popular strain of critique was a lack of empirical basis, but experimental economics and experimental game theory have largely changed that critique (although they have added other critiques, mainly by demonstrating some human behavior that consistently deviates from rational choice theory). Early critiques of the rational choice approach in political science for example, argued that the rational choice theorists could not explain why people voted, much less make more sophisticated arguments about political behavior.

Why rational choice theory?

One question that can be asked is why people try to base their models on concepts such as "reason", "preferences", and what is implied by them, free will. Some potential reasons: a) They see people as "rational" beings, and thus believe that a model in which they are represented as such should be reasonably accurate; b) Assumptions of rationality have useful formal properties; c) The individualistic methodology and the mathematical formalization of rational choice behavior allow for an easier understanding of complex social phenomena.