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The Meaning of Rational Choice Theory

Author: Russell Huebsch
Publish Date: 


Adam Smith--who proposed the idea of an "invisible hand" moving markets in the mid-1770's--usually gets credit as the father of rational choice theory, according to the Hartford Institute for Religion Research. Rational choice theory became the dominant economic theory in the late 1700s, and in the 1960s began to creep into other social sciences--especially the works of sociologists George C. Homans and Peter Blau.


Rational choice theorists treat individual consumers or companies as the basic decision making units, according to according to Steve Green of Baylor University. In a RCT problem, the decisions of a single "unit" are extrapolated for the entire demographic the individual represents. Once the actors in a RCT problem are known, their desires are ascertained to determine the most likely outcome. A consumer purchasing groceries, for example, needs to figure out how much he must spend to maximize his sustenance needs and wants; the seller must settle on a price that nets the most profit, either through pricing or volume.


Small business could use RCT to predict the behavior of its consumers, according to Steve Green. A company that serves a community or demographic whose members have stable incomes, for example, can logically predict steady sales because a consumer with a stable income knows, with some certainty, his future income and spends more willingly than a person with a variable income, such as a farmer.


Marxist theorists, who believe in ownership of business by the people, claim that the classes of society are the decision-makers--not individuals, as rational choice theory states. Theorists who subscribe to institutional thought, believe that institutions are the most important decision makers in society and that RCT oversimplifies the world. Advertising for, example, can influence a purchasing decision and override rational spending. In addition, economists like Herbert Simon critique the extensive mathematical computations of RCT as unrealistic; people generally cannot factor in the dozens of variables that go into making an economic decision.

Expert Insight

In the "real" world, irrational outcomes can result from rational decisions, according to economist Tim Harford of the "Financial Times." Management and CEOs may make highly inflated salaries compared to their job duties, but this just acts as motivation for lower-level employees to work harder so they can attain a high paying, enviable position.

Effectuation Theory

Effectuation theorists believe in the total opposite of rational choice theory. In entrepreneurship, for example, RCT says that a person wanting to start a business would make the most rational and beneficial choices to get it off the ground, such as scouting a location and finding funding--essentially conforming to the market, according to International Institute for Management Development. An effectual person, instead, would attempt to start a business based on his expertise. Rather than finding a location for the business, the effectual entrepreneur might use an expertise in cooking to contract his services to a restaurant and build from there.

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