Capital rationing is the act of placing restrictions on the amount of new

investments or projects undertaken by a compan

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What is the 'Rational Choice Theory'

Rational choice theory is an economic principle that states that individuals always
make prudent and logical decisions. These decisions provide people with the
greatest benefit or satisfaction given the choices available and are also in
their highest self-interest. Most mainstream academic assumptions and theories are
based on rational choice theory.

BREAKING DOWN 'Rational Choice Theory'

Rational choice theory assumes that all people try to actively maximize their
advantage in any situation and therefore consistently try to minimize their losses.
The theory is based on the idea that all humans base their decisions on rational
calculations, act with rationality when choosing, and aim to increase either
pleasure or profit. Rational choice theory also stipulates that all complex social
phenomena are driven by individual human actions. Therefore, if an economist wants
to explain social change or the actions of social institutions, he needs to look at
the rational decisions of the individuals that make up the whole.
Arguments Against Rational Choice Theory
However, many economists do not believe in rational choice theory. Dissenters have
pointed out that individuals do not always make rational utility-maximizing
decisions. For example, the field of behavioral economics is based on the idea that
individuals often make irrational decisions and explores why they do so.

Additionally, Nobel laureate Herbert Simon proposed the theory of bounded

rationality, which says that people are not always able to obtain all the
information they would need to make the best possible decision. Further, economist
Richard Thaler's idea of mental accounting shows how people behave irrationally by
placing greater value on some dollars than others, even though all dollars have the
same value. They might drive to another store to save $10 on a $20 purchase, but
they would not drive to another store to save $10 on a $1,000 purchase.

An Example Against Rational Choice Theory

While rational choice theory is clean 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 24, 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, when the United Kingdom officially
decided to leave the European Union. The financial markets then responded in kind
with shock, wildly increasing short-term volatility, as measured by the CBOE
Volatility Index (VIX).

Further, research conducted by Christopher Simms of Dalhousie University in

Halifax, Canada, shows that when people are anxious, they fail to make rational
decisions. Stressors that produce anxiety have been shown to actually suppress
parts of the brain that aid in rational decision-making.

Trading Center

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Behavior Capital Rationing Paradox of Rationality Rationalization Financial
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The rational expectations theory is an economic idea that the people make choices
based on their rational outlook, available information and past experiences. The
theory suggests that the current expectations in the economy are equivalent to what
people think the future state of the economy will become. This contrasts with the
idea that government policy influences people's decisions.

BREAKING DOWN 'Rational Expectations Theory'

The rational expectations theory is often used to explain expected rates of
inflation. For example, if inflation rates within an economy were higher than
expected in the past, people take that into account along with other indicators to
assume that inflation may further increase in the future.
The rational expectations theory also explains how producers and suppliers use past
events to predict future business operations. If a company believes that the price
for its product will be higher in the future, for example, it will stop or slow
production until the price rises. Since the company weakens supply while demand
stays the same, the price will increase. The producer believes that the price will
rise in the future and makes a rational decision to slow production, and this
decision partially affects what happens in the future. By relying on the rational
expectations theory, companies can inadvertently effect future inflation in an
economy.

Read More +

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Rational Choice Theory + SUBSCRIBE

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What is the 'Rational Choice Theory'

Rational choice theory is an economic principle that states that individuals always
make prudent and logical decisions. These decisions provide people with the
greatest benefit or satisfaction given the choices available and are also in
their highest self-interest. Most mainstream academic assumptions and theories are
based on rational choice theory.

BREAKING DOWN 'Rational Choice Theory'

Rational choice theory assumes that all people try to actively maximize their
advantage in any situation and therefore consistently try to minimize their losses.
The theory is based on the idea that all humans base their decisions on rational
calculations, act with rationality when choosing, and aim to increase either
pleasure or profit. Rational choice theory also stipulates that all complex social
phenomena are driven by individual human actions. Therefore, if an economist wants
to explain social change or the actions of social institutions, he needs to look at
the rational decisions of the individuals that make up the whole.
Arguments Against Rational Choice Theory
However, many economists do not believe in rational choice theory. Dissenters have
pointed out that individuals do not always make rational utility-maximizing
decisions. For example, the field of behavioral economics is based on the idea that
individuals often make irrational decisions and explores why they do so.

Additionally, Nobel laureate Herbert Simon proposed the theory of bounded

rationality, which says that people are not always able to obtain all the
information they would need to make the best possible decision. Further, economist
Richard Thaler's idea of mental accounting shows how people behave irrationally by
placing greater value on some dollars than others, even though all dollars have the
same value. They might drive to another store to save $10 on a $20 purchase, but
they would not drive to another store to save $10 on a $1,000 purchase.

An Example Against Rational Choice Theory

While rational choice theory is clean 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 24, 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, when the United Kingdom officially
decided to leave the European Union. The financial markets then responded in kind
with shock, wildly increasing short-term volatility, as measured by the CBOE
Volatility Index (VIX).

Further, research conducted by Christopher Simms of Dalhousie University in

Halifax, Canada, shows that when people are anxious, they fail to make rational
decisions. Stressors that produce anxiety have been shown to actually suppress
parts of the brain that aid in rational decision-making.

Trading Center

NEXT UP
Rational Choice Theory Rational Expectations Theory Rationing Rational
Behavior Capital Rationing Paradox of Rationality Rationalization Financial
Economics Neoclassical Economics Social Choice Theory

Rational Expectations Theory + SUBSCRIBE

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The rational expectations theory is an economic idea that the people make choices
based on their rational outlook, available information and past experiences. The
theory suggests that the current expectations in the economy are equivalent to what
people think the future state of the economy will become. This contrasts with the
idea that government policy influences people's decisions.

BREAKING DOWN 'Rational Expectations Theory'

The rational expectations theory is often used to explain expected rates of
inflation. For example, if inflation rates within an economy were higher than
expected in the past, people take that into account along with other indicators to
assume that inflation may further increase in the future.
The rational expectations theory also explains how producers and suppliers use past
events to predict future business operations. If a company believes that the price
for its product will be higher in the future, for example, it will stop or slow
production until the price rises. Since the company weakens supply while demand
stays the same, the price will increase. The producer believes that the price will
rise in the future and makes a rational decision to slow production, and this
decision partially affects what happens in the future. By relying on the rational
expectations theory, companies can inadvertently effect future inflation in an
economy.

Read More +

Search Investopedia

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Rational Choice Theory + SUBSCRIBE

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What is the 'Rational Choice Theory'

Rational choice theory is an economic principle that states that individuals always
make prudent and logical decisions. These decisions provide people with the
greatest benefit or satisfaction given the choices available and are also in
their highest self-interest. Most mainstream academic assumptions and theories are
based on rational choice theory.

BREAKING DOWN 'Rational Choice Theory'

Rational choice theory assumes that all people try to actively maximize their
advantage in any situation and therefore consistently try to minimize their losses.
The theory is based on the idea that all humans base their decisions on rational
calculations, act with rationality when choosing, and aim to increase either
pleasure or profit. Rational choice theory also stipulates that all complex social
phenomena are driven by individual human actions. Therefore, if an economist wants
to explain social change or the actions of social institutions, he needs to look at
the rational decisions of the individuals that make up the whole.
Arguments Against Rational Choice Theory
However, many economists do not believe in rational choice theory. Dissenters have
pointed out that individuals do not always make rational utility-maximizing
decisions. For example, the field of behavioral economics is based on the idea that
individuals often make irrational decisions and explores why they do so.

Additionally, Nobel laureate Herbert Simon proposed the theory of bounded

rationality, which says that people are not always able to obtain all the
information they would need to make the best possible decision. Further, economist
Richard Thaler's idea of mental accounting shows how people behave irrationally by
placing greater value on some dollars than others, even though all dollars have the
same value. They might drive to another store to save $10 on a $20 purchase, but
they would not drive to another store to save $10 on a $1,000 purchase.

An Example Against Rational Choice Theory

While rational choice theory is clean 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 24, 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, when the United Kingdom officially
decided to leave the European Union. The financial markets then responded in kind
with shock, wildly increasing short-term volatility, as measured by the CBOE
Volatility Index (VIX).
Further, research conducted by Christopher Simms of Dalhousie University in
Halifax, Canada, shows that when people are anxious, they fail to make rational
decisions. Stressors that produce anxiety have been shown to actually suppress
parts of the brain that aid in rational decision-making.

Trading Center

NEXT UP
Rational Choice Theory Rational Expectations Theory Rationing Rational
Behavior Capital Rationing Paradox of Rationality Rationalization Financial
Economics Neoclassical Economics Social Choice Theory

Rational Expectations Theory + SUBSCRIBE

SHARE
The rational expectations theory is an economic idea that the people make choices
based on their rational outlook, available information and past experiences. The
theory suggests that the current expectations in the economy are equivalent to what
people think the future state of the economy will become. This contrasts with the
idea that government policy influences people's decisions.

BREAKING DOWN 'Rational Expectations Theory'

The rational expectations theory is often used to explain expected rates of
inflation. For example, if inflation rates within an economy were higher than
expected in the past, people take that into account along with other indicators to
assume that inflation may further increase in the future.
The rational expectations theory also explains how producers and suppliers use past
events to predict future business operations. If a company believes that the price
for its product will be higher in the future, for example, it will stop or slow
production until the price rises. Since the company weakens supply while demand
stays the same, the price will increase. The producer believes that the price will
rise in the future and makes a rational decision to slow production, and this
decision partially affects what happens in the future. By relying on the rational
expectations theory, companies can inadvertently effect future inflation in an
economy.

Read More +

Search Investopedia

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Rational Choice Theory + SUBSCRIBE

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What is the 'Rational Choice Theory'

Rational choice theory is an economic principle that states that individuals always
make prudent and logical decisions. These decisions provide people with the
greatest benefit or satisfaction given the choices available and are also in
their highest self-interest. Most mainstream academic assumptions and theories are
based on rational choice theory.

BREAKING DOWN 'Rational Choice Theory'

Rational choice theory assumes that all people try to actively maximize their
advantage in any situation and therefore consistently try to minimize their losses.
The theory is based on the idea that all humans base their decisions on rational
calculations, act with rationality when choosing, and aim to increase either
pleasure or profit. Rational choice theory also stipulates that all complex social
phenomena are driven by individual human actions. Therefore, if an economist wants
to explain social change or the actions of social institutions, he needs to look at
the rational decisions of the individuals that make up the whole.
Arguments Against Rational Choice Theory
However, many economists do not believe in rational choice theory. Dissenters have
pointed out that individuals do not always make rational utility-maximizing
decisions. For example, the field of behavioral economics is based on the idea that
individuals often make irrational decisions and explores why they do so.

Additionally, Nobel laureate Herbert Simon proposed the theory of bounded

rationality, which says that people are not always able to obtain all the
information they would need to make the best possible decision. Further, economist
Richard Thaler's idea of mental accounting shows how people behave irrationally by
placing greater value on some dollars than others, even though all dollars have the
same value. They might drive to another store to save $10 on a $20 purchase, but
they would not drive to another store to save $10 on a $1,000 purchase.

An Example Against Rational Choice Theory

While rational choice theory is clean 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 24, 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, when the United Kingdom officially
decided to leave the European Union. The financial markets then responded in kind
with shock, wildly increasing short-term volatility, as measured by the CBOE
Volatility Index (VIX).

Further, research conducted by Christopher Simms of Dalhousie University in

Halifax, Canada, shows that when people are anxious, they fail to make rational
decisions. Stressors that produce anxiety have been shown to actually suppress
parts of the brain that aid in rational decision-making.

Trading Center

NEXT UP
Rational Choice Theory Rational Expectations Theory Rationing Rational
Behavior Capital Rationing Paradox of Rationality Rationalization Financial
Economics Neoclassical Economics Social Choice Theory

Rational Expectations Theory + SUBSCRIBE

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The rational expectations theory is an economic idea that the people make choices
based on their rational outlook, available information and past experiences. The
theory suggests that the current expectations in the economy are equivalent to what
people think the future state of the economy will become. This contrasts with the
idea that government policy influences people's decisions.

BREAKING DOWN 'Rational Expectations Theory'

The rational expectations theory is often used to explain expected rates of
inflation. For example, if inflation rates within an economy were higher than
expected in the past, people take that into account along with other indicators to
assume that inflation may further increase in the future.
The rational expectations theory also explains how producers and suppliers use past
events to predict future business operations. If a company believes that the price
for its product will be higher in the future, for example, it will stop or slow
production until the price rises. Since the company weakens supply while demand
stays the same, the price will increase. The producer believes that the price will
rise in the future and makes a rational decision to slow production, and this
decision partially affects what happens in the future. By relying on the rational
expectations theory, companies can inadvertently effect future inflation in an
economy.

Read More +

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What is the 'Rational Choice Theory'

Rational choice theory is an economic principle that states that individuals always
make prudent and logical decisions. These decisions provide people with the
greatest benefit or satisfaction given the choices available and are also in
their highest self-interest. Most mainstream academic assumptions and theories are
based on rational choice theory.

BREAKING DOWN 'Rational Choice Theory'

Rational choice theory assumes that all people try to actively maximize their
advantage in any situation and therefore consistently try to minimize their losses.
The theory is based on the idea that all humans base their decisions on rational
calculations, act with rationality when choosing, and aim to increase either
pleasure or profit. Rational choice theory also stipulates that all complex social
phenomena are driven by individual human actions. Therefore, if an economist wants
to explain social change or the actions of social institutions, he needs to look at
the rational decisions of the individuals that make up the whole.
Arguments Against Rational Choice Theory
However, many economists do not believe in rational choice theory. Dissenters have
pointed out that individuals do not always make rational utility-maximizing
decisions. For example, the field of behavioral economics is based on the idea that
individuals often make irrational decisions and explores why they do so.

Additionally, Nobel laureate Herbert Simon proposed the theory of bounded

rationality, which says that people are not always able to obtain all the
information they would need to make the best possible decision. Further, economist
Richard Thaler's idea of mental accounting shows how people behave irrationally by
placing greater value on some dollars than others, even though all dollars have the
same value. They might drive to another store to save $10 on a $20 purchase, but
they would not drive to another store to save $10 on a $1,000 purchase.

An Example Against Rational Choice Theory

While rational choice theory is clean 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 24, 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, when the United Kingdom officially
decided to leave the European Union. The financial markets then responded in kind
with shock, wildly increasing short-term volatility, as measured by the CBOE
Volatility Index (VIX).

Further, research conducted by Christopher Simms of Dalhousie University in

Halifax, Canada, shows that when people are anxious, they fail to make rational
decisions. Stressors that produce anxiety have been shown to actually suppress
parts of the brain that aid in rational decision-making.

Trading Center

NEXT UP
Rational Choice Theory Rational Expectations Theory Rationing Rational
Behavior Capital Rationing Paradox of Rationality Rationalization Financial
Economics Neoclassical Economics Social Choice Theory

Rational Expectations Theory + SUBSCRIBE

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The rational expectations theory is an economic idea that the people make choices
based on their rational outlook, available information and past experiences. The
theory suggests that the current expectations in the economy are equivalent to what
people think the future state of the economy will become. This contrasts with the
idea that government policy influences people's decisions.

BREAKING DOWN 'Rational Expectations Theory'

The rational expectations theory is often used to explain expected rates of
inflation. For example, if inflation rates within an economy were higher than
expected in the past, people take that into account along with other indicators to
assume that inflation may further increase in the future.
The rational expectations theory also explains how producers and suppliers use past
events to predict future business operations. If a company believes that the price
for its product will be higher in the future, for example, it will stop or slow
production until the price rises. Since the company weakens supply while demand
stays the same, the price will increase. The producer believes that the price will
rise in the future and makes a rational decision to slow production, and this
decision partially affects what happens in the future. By relying on the rational
expectations theory, companies can inadvertently effect future inflation in an
economy.

Read More +

Search Investopedia

DICTIONARY: # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
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What is the 'Rational Choice Theory'

Rational choice theory is an economic principle that states that individuals always
make prudent and logical decisions. These decisions provide people with the
greatest benefit or satisfaction given the choices available and are also in
their highest self-interest. Most mainstream academic assumptions and theories are
based on rational choice theory.

BREAKING DOWN 'Rational Choice Theory'

Rational choice theory assumes that all people try to actively maximize their
advantage in any situation and therefore consistently try to minimize their losses.
The theory is based on the idea that all humans base their decisions on rational
calculations, act with rationality when choosing, and aim to increase either
pleasure or profit. Rational choice theory also stipulates that all complex social
phenomena are driven by individual human actions. Therefore, if an economist wants
to explain social change or the actions of social institutions, he needs to look at
the rational decisions of the individuals that make up the whole.
Arguments Against Rational Choice Theory
However, many economists do not believe in rational choice theory. Dissenters have
pointed out that individuals do not always make rational utility-maximizing
decisions. For example, the field of behavioral economics is based on the idea that
individuals often make irrational decisions and explores why they do so.

Additionally, Nobel laureate Herbert Simon proposed the theory of bounded

rationality, which says that people are not always able to obtain all the
information they would need to make the best possible decision. Further, economist
Richard Thaler's idea of mental accounting shows how people behave irrationally by
placing greater value on some dollars than others, even though all dollars have the
same value. They might drive to another store to save $10 on a $20 purchase, but
they would not drive to another store to save $10 on a $1,000 purchase.

An Example Against Rational Choice Theory

While rational choice theory is clean 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 24, 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, when the United Kingdom officially
decided to leave the European Union. The financial markets then responded in kind
with shock, wildly increasing short-term volatility, as measured by the CBOE
Volatility Index (VIX).

Further, research conducted by Christopher Simms of Dalhousie University in

Halifax, Canada, shows that when people are anxious, they fail to make rational
decisions. Stressors that produce anxiety have been shown to actually suppress
parts of the brain that aid in rational decision-making.
Trading Center

NEXT UP
Rational Choice Theory Rational Expectations Theory Rationing Rational
Behavior Capital Rationing Paradox of Rationality Rationalization Financial
Economics Neoclassical Economics Social Choice Theory

Rational Expectations Theory + SUBSCRIBE

SHARE
The rational expectations theory is an economic idea that the people make choices
based on their rational outlook, available information and past experiences. The
theory suggests that the current expectations in the economy are equivalent to what
people think the future state of the economy will become. This contrasts with the
idea that government policy influences people's decisions.

BREAKING DOWN 'Rational Expectations Theory'

The rational expectations theory is often used to explain expected rates of
inflation. For example, if inflation rates within an economy were higher than
expected in the past, people take that into account along with other indicators to
assume that inflation may further increase in the future.
The rational expectations theory also explains how producers and suppliers use past
events to predict future business operations. If a company believes that the price
for its product will be higher in the future, for example, it will stop or slow
production until the price rises. Since the company weakens supply while demand
stays the same, the price will increase. The producer believes that the price will
rise in the future and makes a rational decision to slow production, and this
decision partially affects what happens in the future. By relying on the rational
expectations theory, companies can inadvertently effect future inflation in an
economy.

Read More +

Search Investopedia

DICTIONARY: # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
CONTENT LIBRARY
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SPONSORED BY RATHIRA AYURVEDA

What is the 'Rational Choice Theory'

Rational choice theory is an economic principle that states that individuals always
make prudent and logical decisions. These decisions provide people with the
greatest benefit or satisfaction given the choices available and are also in
their highest self-interest. Most mainstream academic assumptions and theories are
based on rational choice theory.

BREAKING DOWN 'Rational Choice Theory'

Rational choice theory assumes that all people try to actively maximize their
advantage in any situation and therefore consistently try to minimize their losses.
The theory is based on the idea that all humans base their decisions on rational
calculations, act with rationality when choosing, and aim to increase either
pleasure or profit. Rational choice theory also stipulates that all complex social
phenomena are driven by individual human actions. Therefore, if an economist wants
to explain social change or the actions of social institutions, he needs to look at
the rational decisions of the individuals that make up the whole.
Arguments Against Rational Choice Theory
However, many economists do not believe in rational choice theory. Dissenters have
pointed out that individuals do not always make rational utility-maximizing
decisions. For example, the field of behavioral economics is based on the idea that
individuals often make irrational decisions and explores why they do so.

Additionally, Nobel laureate Herbert Simon proposed the theory of bounded

rationality, which says that people are not always able to obtain all the
information they would need to make the best possible decision. Further, economist
Richard Thaler's idea of mental accounting shows how people behave irrationally by
placing greater value on some dollars than others, even though all dollars have the
same value. They might drive to another store to save $10 on a $20 purchase, but
they would not drive to another store to save $10 on a $1,000 purchase.

An Example Against Rational Choice Theory

While rational choice theory is clean 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 24, 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, when the United Kingdom officially
decided to leave the European Union. The financial markets then responded in kind
with shock, wildly increasing short-term volatility, as measured by the CBOE
Volatility Index (VIX).

Further, research conducted by Christopher Simms of Dalhousie University in

Halifax, Canada, shows that when people are anxious, they fail to make rational
decisions. Stressors that produce anxiety have been shown to actually suppress
parts of the brain that aid in rational decision-making.
Trading Center

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The rational expectations theory is an economic idea that the people make choices
based on their rational outlook, available information and past experiences. The
theory suggests that the current expectations in the economy are equivalent to what
people think the future state of the economy will become. This contrasts with the
idea that government policy influences people's decisions.

BREAKING DOWN 'Rational Expectations Theory'

The rational expectations theory is often used to explain expected rates of
inflation. For example, if inflation rates within an economy were higher than
expected in the past, people take that into account along with other indicators to
assume that inflation may further increase in the future.
The rational expectations theory also explains how producers and suppliers use past
events to predict future business operations. If a company believes that the price
for its product will be higher in the future, for example, it will stop or slow
production until the price rises. Since the company weakens supply while demand
stays the same, the price will increase. The producer believes that the price will
rise in the future and makes a rational decision to slow production, and this
decision partially affects what happens in the future. By relying on the rational
expectations theory, companies can inadvertently effect future inflation in an
economy.

Read More +

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What is the 'Rational Choice Theory'

Rational choice theory is an economic principle that states that individuals always
make prudent and logical decisions. These decisions provide people with the
greatest benefit or satisfaction given the choices available and are also in
their highest self-interest. Most mainstream academic assumptions and theories are
based on rational choice theory.

BREAKING DOWN 'Rational Choice Theory'

Rational choice theory assumes that all people try to actively maximize their
advantage in any situation and therefore consistently try to minimize their losses.
The theory is based on the idea that all humans base their decisions on rational
calculations, act with rationality when choosing, and aim to increase either
pleasure or profit. Rational choice theory also stipulates that all complex social
phenomena are driven by individual human actions. Therefore, if an economist wants
to explain social change or the actions of social institutions, he needs to look at
the rational decisions of the individuals that make up the whole.
Arguments Against Rational Choice Theory
However, many economists do not believe in rational choice theory. Dissenters have
pointed out that individuals do not always make rational utility-maximizing
decisions. For example, the field of behavioral economics is based on the idea that
individuals often make irrational decisions and explores why they do so.

Additionally, Nobel laureate Herbert Simon proposed the theory of bounded

rationality, which says that people are not always able to obtain all the
information they would need to make the best possible decision. Further, economist
Richard Thaler's idea of mental accounting shows how people behave irrationally by
placing greater value on some dollars than others, even though all dollars have the
same value. They might drive to another store to save $10 on a $20 purchase, but
they would not drive to another store to save $10 on a $1,000 purchase.

An Example Against Rational Choice Theory

While rational choice theory is clean 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 24, 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, when the United Kingdom officially
decided to leave the European Union. The financial markets then responded in kind
with shock, wildly increasing short-term volatility, as measured by the CBOE
Volatility Index (VIX).

Further, research conducted by Christopher Simms of Dalhousie University in

Halifax, Canada, shows that when people are anxious, they fail to make rational
decisions. Stressors that produce anxiety have been shown to actually suppress
parts of the brain that aid in rational decision-making.

Trading Center
NEXT UP
Rational Choice Theory Rational Expectations Theory Rationing Rational
Behavior Capital Rationing Paradox of Rationality Rationalization Financial
Economics Neoclassical Economics Social Choice Theory

Rational Expectations Theory + SUBSCRIBE

SHARE
The rational expectations theory is an economic idea that the people make choices
based on their rational outlook, available information and past experiences. The
theory suggests that the current expectations in the economy are equivalent to what
people think the future state of the economy will become. This contrasts with the
idea that government policy influences people's decisions.

BREAKING DOWN 'Rational Expectations Theory'

The rational expectations theory is often used to explain expected rates of
inflation. For example, if inflation rates within an economy were higher than
expected in the past, people take that into account along with other indicators to
assume that inflation may further increase in the future.
The rational expectations theory also explains how producers and suppliers use past
events to predict future business operations. If a company believes that the price
for its product will be higher in the future, for example, it will stop or slow
production until the price rises. Since the company weakens supply while demand
stays the same, the price will increase. The producer believes that the price will
rise in the future and makes a rational decision to slow production, and this
decision partially affects what happens in the future. By relying on the rational
expectations theory, companies can inadvertently effect future inflation in an
economy.

Read More +

Search Investopedia

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What is the 'Rational Choice Theory'

Rational choice theory is an economic principle that states that individuals always
make prudent and logical decisions. These decisions provide people with the
greatest benefit or satisfaction given the choices available and are also in
their highest self-interest. Most mainstream academic assumptions and theories are
based on rational choice theory.

BREAKING DOWN 'Rational Choice Theory'

Rational choice theory assumes that all people try to actively maximize their
advantage in any situation and therefore consistently try to minimize their losses.
The theory is based on the idea that all humans base their decisions on rational
calculations, act with rationality when choosing, and aim to increase either
pleasure or profit. Rational choice theory also stipulates that all complex social
phenomena are driven by individual human actions. Therefore, if an economist wants
to explain social change or the actions of social institutions, he needs to look at
the rational decisions of the individuals that make up the whole.
Arguments Against Rational Choice Theory
However, many economists do not believe in rational choice theory. Dissenters have
pointed out that individuals do not always make rational utility-maximizing
decisions. For example, the field of behavioral economics is based on the idea that
individuals often make irrational decisions and explores why they do so.

Additionally, Nobel laureate Herbert Simon proposed the theory of bounded

rationality, which says that people are not always able to obtain all the
information they would need to make the best possible decision. Further, economist
Richard Thaler's idea of mental accounting shows how people behave irrationally by
placing greater value on some dollars than others, even though all dollars have the
same value. They might drive to another store to save $10 on a $20 purchase, but
they would not drive to another store to save $10 on a $1,000 purchase.

An Example Against Rational Choice Theory

While rational choice theory is clean 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 24, 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, when the United Kingdom officially
decided to leave the European Union. The financial markets then responded in kind
with shock, wildly increasing short-term volatility, as measured by the CBOE
Volatility Index (VIX).

Further, research conducted by Christopher Simms of Dalhousie University in

Halifax, Canada, shows that when people are anxious, they fail to make rational
decisions. Stressors that produce anxiety have been shown to actually suppress
parts of the brain that aid in rational decision-making.

Trading Center
NEXT UP
Rational Choice Theory Rational Expectations Theory Rationing Rational
Behavior Capital Rationing Paradox of Rationality Rationalization Financial
Economics Neoclassical Economics Social Choice Theory

Rational Expectations Theory + SUBSCRIBE

SHARE
The rational expectations theory is an economic idea that the people make choices
based on their rational outlook, available information and past experiences. The
theory suggests that the current expectations in the economy are equivalent to what
people think the future state of the economy will become. This contrasts with the
idea that government policy influences people's decisions.

BREAKING DOWN 'Rational Expectations Theory'

The rational expectations theory is often used to explain expected rates of
inflation. For example, if inflation rates within an economy were higher than
expected in the past, people take that into account along with other indicators to
assume that inflation may further increase in the future.
The rational expectations theory also explains how producers and suppliers use past
events to predict future business operations. If a company believes that the price
for its product will be higher in the future, for example, it will stop or slow
production until the price rises. Since the company weakens supply while demand
stays the same, the price will increase. The producer believes that the price will
rise in the future and makes a rational decision to slow production, and this
decision partially affects what happens in the future. By relying on the rational
expectations theory, companies can inadvertently effect future inflation in an
economy.

Read More +

Search Investopedia

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 SHARE

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What is the 'Rational Choice Theory'

Rational choice theory is an economic principle that states that individuals always
make prudent and logical decisions. These decisions provide people with the
greatest benefit or satisfaction given the choices available and are also in
their highest self-interest. Most mainstream academic assumptions and theories are
based on rational choice theory.

BREAKING DOWN 'Rational Choice Theory'

Rational choice theory assumes that all people try to actively maximize their
advantage in any situation and therefore consistently try to minimize their losses.
The theory is based on the idea that all humans base their decisions on rational
calculations, act with rationality when choosing, and aim to increase either
pleasure or profit. Rational choice theory also stipulates that all complex social
phenomena are driven by individual human actions. Therefore, if an economist wants
to explain social change or the actions of social institutions, he needs to look at
the rational decisions of the individuals that make up the whole.
Arguments Against Rational Choice Theory
However, many economists do not believe in rational choice theory. Dissenters have
pointed out that individuals do not always make rational utility-maximizing
decisions. For example, the field of behavioral economics is based on the idea that
individuals often make irrational decisions and explores why they do so.

Additionally, Nobel laureate Herbert Simon proposed the theory of bounded

rationality, which says that people are not always able to obtain all the
information they would need to make the best possible decision. Further, economist
Richard Thaler's idea of mental accounting shows how people behave irrationally by
placing greater value on some dollars than others, even though all dollars have the
same value. They might drive to another store to save $10 on a $20 purchase, but
they would not drive to another store to save $10 on a $1,000 purchase.

An Example Against Rational Choice Theory

While rational choice theory is clean 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 24, 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, when the United Kingdom officially
decided to leave the European Union. The financial markets then responded in kind
with shock, wildly increasing short-term volatility, as measured by the CBOE
Volatility Index (VIX).

Further, research conducted by Christopher Simms of Dalhousie University in

Halifax, Canada, shows that when people are anxious, they fail to make rational
decisions. Stressors that produce anxiety have been shown to actually suppress
parts of the brain that aid in rational decision-making.

Trading Center

NEXT UP
Rational Choice Theory Rational Expectations Theory Rationing Rational
Behavior Capital Rationing Paradox of Rationality Rationalization Financial
Economics Neoclassical Economics Social Choice Theory

Rational Expectations Theory + SUBSCRIBE

SHARE
The rational expectations theory is an economic idea that the people make choices
based on their rational outlook, available information and past experiences. The
theory suggests that the current expectations in the economy are equivalent to what
people think the future state of the economy will become. This contrasts with the
idea that government policy influences people's decisions.

BREAKING DOWN 'Rational Expectations Theory'

The rational expectations theory is often used to explain expected rates of
inflation. For example, if inflation rates within an economy were higher than
expected in the past, people take that into account along with other indicators to
assume that inflation may further increase in the future.
The rational expectations theory also explains how producers and suppliers use past
events to predict future business operations. If a company believes that the price
for its product will be higher in the future, for example, it will stop or slow
production until the price rises. Since the company weakens supply while demand
stays the same, the price will increase. The producer believes that the price will
rise in the future and makes a rational decision to slow production, and this
decision partially affects what happens in the future. By relying on the rational
expectations theory, companies can inadvertently effect future inflation in an
economy.

Read More +

Search Investopedia

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10 DAYS HAIR OIL - 3000 HAPPY CUSTOMERS & 100+ REVIEWS.
SPONSORED BY RATHIRA AYURVEDA

What is the 'Rational Choice Theory'

Rational choice theory is an economic principle that states that individuals always
make prudent and logical decisions. These decisions provide people with the
greatest benefit or satisfaction given the choices available and are also in
their highest self-interest. Most mainstream academic assumptions and theories are
based on rational choice theory.

BREAKING DOWN 'Rational Choice Theory'

Rational choice theory assumes that all people try to actively maximize their
advantage in any situation and therefore consistently try to minimize their losses.
The theory is based on the idea that all humans base their decisions on rational
calculations, act with rationality when choosing, and aim to increase either
pleasure or profit. Rational choice theory also stipulates that all complex social
phenomena are driven by individual human actions. Therefore, if an economist wants
to explain social change or the actions of social institutions, he needs to look at
the rational decisions of the individuals that make up the whole.
Arguments Against Rational Choice Theory
However, many economists do not believe in rational choice theory. Dissenters have
pointed out that individuals do not always make rational utility-maximizing
decisions. For example, the field of behavioral economics is based on the idea that
individuals often make irrational decisions and explores why they do so.

Additionally, Nobel laureate Herbert Simon proposed the theory of bounded

rationality, which says that people are not always able to obtain all the
information they would need to make the best possible decision. Further, economist
Richard Thaler's idea of mental accounting shows how people behave irrationally by
placing greater value on some dollars than others, even though all dollars have the
same value. They might drive to another store to save $10 on a $20 purchase, but
they would not drive to another store to save $10 on a $1,000 purchase.

An Example Against Rational Choice Theory

While rational choice theory is clean 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 24, 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, when the United Kingdom officially
decided to leave the European Union. The financial markets then responded in kind
with shock, wildly increasing short-term volatility, as measured by the CBOE
Volatility Index (VIX).

Further, research conducted by Christopher Simms of Dalhousie University in

Halifax, Canada, shows that when people are anxious, they fail to make rational
decisions. Stressors that produce anxiety have been shown to actually suppress
parts of the brain that aid in rational decision-making.

Trading Center

NEXT UP
Rational Choice Theory Rational Expectations Theory Rationing Rational
Behavior Capital Rationing Paradox of Rationality Rationalization Financial
Economics Neoclassical Economics Social Choice Theory

Rational Expectations Theory + SUBSCRIBE

SHARE
The rational expectations theory is an economic idea that the people make choices
based on their rational outlook, available information and past experiences. The
theory suggests that the current expectations in the economy are equivalent to what
people think the future state of the economy will become. This contrasts with the
idea that government policy influences people's decisions.

BREAKING DOWN 'Rational Expectations Theory'

The rational expectations theory is often used to explain expected rates of
inflation. For example, if inflation rates within an economy were higher than
expected in the past, people take that into account along with other indicators to
assume that inflation may further increase in the future.
The rational expectations theory also explains how producers and suppliers use past
events to predict future business operations. If a company believes that the price
for its product will be higher in the future, for example, it will stop or slow
production until the price rises. Since the company weakens supply while demand
stays the same, the price will increase. The producer believes that the price will
rise in the future and makes a rational decision to slow production, and this
decision partially affects what happens in the future. By relying on the rational
expectations theory, companies can inadvertently effect future inflation in an
economy.

Read More +

Search Investopedia

DICTIONARY: # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
CONTENT LIBRARY
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What is the 'Rational Choice Theory'

Rational choice theory is an economic principle that states that individuals always
make prudent and logical decisions. These decisions provide people with the
greatest benefit or satisfaction given the choices available and are also in
their highest self-interest. Most mainstream academic assumptions and theories are
based on rational choice theory.

BREAKING DOWN 'Rational Choice Theory'

Rational choice theory assumes that all people try to actively maximize their
advantage in any situation and therefore consistently try to minimize their losses.
The theory is based on the idea that all humans base their decisions on rational
calculations, act with rationality when choosing, and aim to increase either
pleasure or profit. Rational choice theory also stipulates that all complex social
phenomena are driven by individual human actions. Therefore, if an economist wants
to explain social change or the actions of social institutions, he needs to look at
the rational decisions of the individuals that make up the whole.
Arguments Against Rational Choice Theory
However, many economists do not believe in rational choice theory. Dissenters have
pointed out that individuals do not always make rational utility-maximizing
decisions. For example, the field of behavioral economics is based on the idea that
individuals often make irrational decisions and explores why they do so.

Additionally, Nobel laureate Herbert Simon proposed the theory of bounded

rationality, which says that people are not always able to obtain all the
information they would need to make the best possible decision. Further, economist
Richard Thaler's idea of mental accounting shows how people behave irrationally by
placing greater value on some dollars than others, even though all dollars have the
same value. They might drive to another store to save $10 on a $20 purchase, but
they would not drive to another store to save $10 on a $1,000 purchase.

An Example Against Rational Choice Theory

While rational choice theory is clean 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 24, 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, when the United Kingdom officially
decided to leave the European Union. The financial markets then responded in kind
with shock, wildly increasing short-term volatility, as measured by the CBOE
Volatility Index (VIX).

Further, research conducted by Christopher Simms of Dalhousie University in

Halifax, Canada, shows that when people are anxious, they fail to make rational
decisions. Stressors that produce anxiety have been shown to actually suppress
parts of the brain that aid in rational decision-making.

Trading Center

NEXT UP
Rational Choice Theory Rational Expectations Theory Rationing Rational
Behavior Capital Rationing Paradox of Rationality Rationalization Financial
Economics Neoclassical Economics Social Choice Theory
Rational Expectations Theory + SUBSCRIBE
SHARE
The rational expectations theory is an economic idea that the people make choices
based on their rational outlook, available information and past experiences. The
theory suggests that the current expectations in the economy are equivalent to what
people think the future state of the economy will become. This contrasts with the
idea that government policy influences people's decisions.

BREAKING DOWN 'Rational Expectations Theory'

The rational expectations theory is often used to explain expected rates of
inflation. For example, if inflation rates within an economy were higher than
expected in the past, people take that into account along with other indicators to
assume that inflation may further increase in the future.
The rational expectations theory also explains how producers and suppliers use past
events to predict future business operations. If a company believes that the price
for its product will be higher in the future, for example, it will stop or slow
production until the price rises. Since the company weakens supply while demand
stays the same, the price will increase. The producer believes that the price will
rise in the future and makes a rational decision to slow production, and this
decision partially affects what happens in the future. By relying on the rational
expectations theory, companies can inadvertently effect future inflation in an
economy.

Read More +

Search Investopedia

DICTIONARY: # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
CONTENT LIBRARY
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What is the 'Rational Choice Theory'

Rational choice theory is an economic principle that states that individuals always
make prudent and logical decisions. These decisions provide people with the
greatest benefit or satisfaction given the choices available and are also in
their highest self-interest. Most mainstream academic assumptions and theories are
based on rational choice theory.

BREAKING DOWN 'Rational Choice Theory'

Rational choice theory assumes that all people try to actively maximize their
advantage in any situation and therefore consistently try to minimize their losses.
The theory is based on the idea that all humans base their decisions on rational
calculations, act with rationality when choosing, and aim to increase either
pleasure or profit. Rational choice theory also stipulates that all complex social
phenomena are driven by individual human actions. Therefore, if an economist wants
to explain social change or the actions of social institutions, he needs to look at
the rational decisions of the individuals that make up the whole.
Arguments Against Rational Choice Theory
However, many economists do not believe in rational choice theory. Dissenters have
pointed out that individuals do not always make rational utility-maximizing
decisions. For example, the field of behavioral economics is based on the idea that
individuals often make irrational decisions and explores why they do so.

Additionally, Nobel laureate Herbert Simon proposed the theory of bounded

rationality, which says that people are not always able to obtain all the
information they would need to make the best possible decision. Further, economist
Richard Thaler's idea of mental accounting shows how people behave irrationally by
placing greater value on some dollars than others, even though all dollars have the
same value. They might drive to another store to save $10 on a $20 purchase, but
they would not drive to another store to save $10 on a $1,000 purchase.

An Example Against Rational Choice Theory

While rational choice theory is clean 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 24, 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, when the United Kingdom officially
decided to leave the European Union. The financial markets then responded in kind
with shock, wildly increasing short-term volatility, as measured by the CBOE
Volatility Index (VIX).

Further, research conducted by Christopher Simms of Dalhousie University in

Halifax, Canada, shows that when people are anxious, they fail to make rational
decisions. Stressors that produce anxiety have been shown to actually suppress
parts of the brain that aid in rational decision-making.

Trading Center

NEXT UP
Rational Choice Theory Rational Expectations Theory Rationing Rational
Behavior Capital Rationing Paradox of Rationality Rationalization Financial
Economics Neoclassical Economics Social Choice Theory

Rational Expectations Theory + SUBSCRIBE

SHARE
The rational expectations theory is an economic idea that the people make choices
based on their rational outlook, available information and past experiences. The
theory suggests that the current expectations in the economy are equivalent to what
people think the future state of the economy will become. This contrasts with the
idea that government policy influences people's decisions.

BREAKING DOWN 'Rational Expectations Theory'

The rational expectations theory is often used to explain expected rates of
inflation. For example, if inflation rates within an economy were higher than
expected in the past, people take that into account along with other indicators to
assume that inflation may further increase in the future.
The rational expectations theory also explains how producers and suppliers use past
events to predict future business operations. If a company believes that the price
for its product will be higher in the future, for example, it will stop or slow
production until the price rises. Since the company weakens supply while demand
stays the same, the price will increase. The producer believes that the price will
rise in the future and makes a rational decision to slow production, and this
decision partially affects what happens in the future. By relying on the rational
expectations theory, companies can inadvertently effect future inflation in an
economy.

Read More +

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What is the 'Rational Choice Theory'

Rational choice theory is an economic principle that states that individuals always
make prudent and logical decisions. These decisions provide people with the
greatest benefit or satisfaction given the choices available and are also in
their highest self-interest. Most mainstream academic assumptions and theories are
based on rational choice theory.

BREAKING DOWN 'Rational Choice Theory'

Rational choice theory assumes that all people try to actively maximize their
advantage in any situation and therefore consistently try to minimize their losses.
The theory is based on the idea that all humans base their decisions on rational
calculations, act with rationality when choosing, and aim to increase either
pleasure or profit. Rational choice theory also stipulates that all complex social
phenomena are driven by individual human actions. Therefore, if an economist wants
to explain social change or the actions of social institutions, he needs to look at
the rational decisions of the individuals that make up the whole.
Arguments Against Rational Choice Theory
However, many economists do not believe in rational choice theory. Dissenters have
pointed out that individuals do not always make rational utility-maximizing
decisions. For example, the field of behavioral economics is based on the idea that
individuals often make irrational decisions and explores why they do so.

Additionally, Nobel laureate Herbert Simon proposed the theory of bounded

rationality, which says that people are not always able to obtain all the
information they would need to make the best possible decision. Further, economist
Richard Thaler's idea of mental accounting shows how people behave irrationally by
placing greater value on some dollars than others, even though all dollars have the
same value. They might drive to another store to save $10 on a $20 purchase, but
they would not drive to another store to save $10 on a $1,000 purchase.

An Example Against Rational Choice Theory

While rational choice theory is clean 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 24, 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, when the United Kingdom officially
decided to leave the European Union. The financial markets then responded in kind
with shock, wildly increasing short-term volatility, as measured by the CBOE
Volatility Index (VIX).

Further, research conducted by Christopher Simms of Dalhousie University in

Halifax, Canada, shows that when people are anxious, they fail to make rational
decisions. Stressors that produce anxiety have been shown to actually suppress
parts of the brain that aid in rational decision-making.

Trading Center

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Behavior Capital Rationing Paradox of Rationality Rationalization Financial
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The rational expectations theory is an economic idea that the people make choices
based on their rational outlook, available information and past experiences. The
theory suggests that the current expectations in the economy are equivalent to what
people think the future state of the economy will become. This contrasts with the
idea that government policy influences people's decisions.

BREAKING DOWN 'Rational Expectations Theory'

The rational expectations theory is often used to explain expected rates of
inflation. For example, if inflation rates within an economy were higher than
expected in the past, people take that into account along with other indicators to
assume that inflation may further increase in the future.
The rational expectations theory also explains how producers and suppliers use past
events to predict future business operations. If a company believes that the price
for its product will be higher in the future, for example, it will stop or slow
production until the price rises. Since the company weakens supply while demand
stays the same, the price will increase. The producer believes that the price will
rise in the future and makes a rational decision to slow production, and this
decision partially affects what happens in the future. By relying on the rational
expectations theory, companies can inadvertently effect future inflation in an
economy.

Read More +

Search Investopedia

DICTIONARY: # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
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Rational Choice Theory + SUBSCRIBE

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What is the 'Rational Choice Theory'

Rational choice theory is an economic principle that states that individuals always
make prudent and logical decisions. These decisions provide people with the
greatest benefit or satisfaction given the choices available and are also in
their highest self-interest. Most mainstream academic assumptions and theories are
based on rational choice theory.

BREAKING DOWN 'Rational Choice Theory'

Rational choice theory assumes that all people try to actively maximize their
advantage in any situation and therefore consistently try to minimize their losses.
The theory is based on the idea that all humans base their decisions on rational
calculations, act with rationality when choosing, and aim to increase either
pleasure or profit. Rational choice theory also stipulates that all complex social
phenomena are driven by individual human actions. Therefore, if an economist wants
to explain social change or the actions of social institutions, he needs to look at
the rational decisions of the individuals that make up the whole.
Arguments Against Rational Choice Theory
However, many economists do not believe in rational choice theory. Dissenters have
pointed out that individuals do not always make rational utility-maximizing
decisions. For example, the field of behavioral economics is based on the idea that
individuals often make irrational decisions and explores why they do so.

Additionally, Nobel laureate Herbert Simon proposed the theory of bounded

rationality, which says that people are not always able to obtain all the
information they would need to make the best possible decision. Further, economist
Richard Thaler's idea of mental accounting shows how people behave irrationally by
placing greater value on some dollars than others, even though all dollars have the
same value. They might drive to another store to save $10 on a $20 purchase, but
they would not drive to another store to save $10 on a $1,000 purchase.

An Example Against Rational Choice Theory

While rational choice theory is clean 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 24, 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, when the United Kingdom officially
decided to leave the European Union. The financial markets then responded in kind
with shock, wildly increasing short-term volatility, as measured by the CBOE
Volatility Index (VIX).

Further, research conducted by Christopher Simms of Dalhousie University in

Halifax, Canada, shows that when people are anxious, they fail to make rational
decisions. Stressors that produce anxiety have been shown to actually suppress
parts of the brain that aid in rational decision-making.

Trading Center

NEXT UP
Rational Choice Theory Rational Expectations Theory Rationing Rational
Behavior Capital Rationing Paradox of Rationality Rationalization Financial
Economics Neoclassical Economics Social Choice Theory

Rational Expectations Theory + SUBSCRIBE

SHARE
The rational expectations theory is an economic idea that the people make choices
based on their rational outlook, available information and past experiences. The
theory suggests that the current expectations in the economy are equivalent to what
people think the future state of the economy will become. This contrasts with the
idea that government policy influences people's decisions.

BREAKING DOWN 'Rational Expectations Theory'

The rational expectations theory is often used to explain expected rates of
inflation. For example, if inflation rates within an economy were higher than
expected in the past, people take that into account along with other indicators to
assume that inflation may further increase in the future.
The rational expectations theory also explains how producers and suppliers use past
events to predict future business operations. If a company believes that the price
for its product will be higher in the future, for example, it will stop or slow
production until the price rises. Since the company weakens supply while demand
stays the same, the price will increase. The producer believes that the price will
rise in the future and makes a rational decision to slow production, and this
decision partially affects what happens in the future. By relying on the rational
expectations theory, companies can inadvertently effect future inflation in an
economy.

Read More +

Search Investopedia

DICTIONARY: # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
CONTENT LIBRARY
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NEW Academy

Rational Choice Theory + SUBSCRIBE

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10 DAYS HAIR OIL - 3000 HAPPY CUSTOMERS & 100+ REVIEWS.

SPONSORED BY RATHIRA AYURVEDA

What is the 'Rational Choice Theory'

Rational choice theory is an economic principle that states that individuals always
make prudent and logical decisions. These decisions provide people with the
greatest benefit or satisfaction given the choices available and are also in
their highest self-interest. Most mainstream academic assumptions and theories are
based on rational choice theory.
BREAKING DOWN 'Rational Choice Theory'
Rational choice theory assumes that all people try to actively maximize their
advantage in any situation and therefore consistently try to minimize their losses.
The theory is based on the idea that all humans base their decisions on rational
calculations, act with rationality when choosing, and aim to increase either
pleasure or profit. Rational choice theory also stipulates that all complex social
phenomena are driven by individual human actions. Therefore, if an economist wants
to explain social change or the actions of social institutions, he needs to look at
the rational decisions of the individuals that make up the whole.
Arguments Against Rational Choice Theory
However, many economists do not believe in rational choice theory. Dissenters have
pointed out that individuals do not always make rational utility-maximizing
decisions. For example, the field of behavioral economics is based on the idea that
individuals often make irrational decisions and explores why they do so.

Additionally, Nobel laureate Herbert Simon proposed the theory of bounded

rationality, which says that people are not always able to obtain all the
information they would need to make the best possible decision. Further, economist
Richard Thaler's idea of mental accounting shows how people behave irrationally by
placing greater value on some dollars than others, even though all dollars have the
same value. They might drive to another store to save $10 on a $20 purchase, but
they would not drive to another store to save $10 on a $1,000 purchase.

An Example Against Rational Choice Theory

While rational choice theory is clean 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 24, 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, when the United Kingdom officially
decided to leave the European Union. The financial markets then responded in kind
with shock, wildly increasing short-term volatility, as measured by the CBOE
Volatility Index (VIX).

Further, research conducted by Christopher Simms of Dalhousie University in

Halifax, Canada, shows that when people are anxious, they fail to make rational
decisions. Stressors that produce anxiety have been shown to actually suppress
parts of the brain that aid in rational decision-making.

Trading Center

NEXT UP
Rational Choice Theory Rational Expectations Theory Rationing Rational
Behavior Capital Rationing Paradox of Rationality Rationalization Financial
Economics Neoclassical Economics Social Choice Theory

Rational Expectations Theory + SUBSCRIBE

SHARE
The rational expectations theory is an economic idea that the people make choices
based on their rational outlook, available information and past experiences. The
theory suggests that the current expectations in the economy are equivalent to what
people think the future state of the economy will become. This contrasts with the
idea that government policy influences people's decisions.
BREAKING DOWN 'Rational Expectations Theory'
The rational expectations theory is often used to explain expected rates of
inflation. For example, if inflation rates within an economy were higher than
expected in the past, people take that into account along with other indicators to
assume that inflation may further increase in the future.
The rational expectations theory also explains how producers and suppliers use past
events to predict future business operations. If a company believes that the price
for its product will be higher in the future, for example, it will stop or slow
production until the price rises. Since the company weakens supply while demand
stays the same, the price will increase. The producer believes that the price will
rise in the future and makes a rational decision to slow production, and this
decision partially affects what happens in the future. By relying on the rational
expectations theory, companies can inadvertently effect future inflation in an
economy.

Read More +

Search Investopedia

DICTIONARY: # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
CONTENT LIBRARY
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NEW Academy

Rational Choice Theory + SUBSCRIBE

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10 DAYS HAIR OIL - 3000 HAPPY CUSTOMERS & 100+ REVIEWS.

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What is the 'Rational Choice Theory'

Rational choice theory is an economic principle that states that individuals always
make prudent and logical decisions. These decisions provide people with the
greatest benefit or satisfaction given the choices available and are also in
their highest self-interest. Most mainstream academic assumptions and theories are
based on rational choice theory.

BREAKING DOWN 'Rational Choice Theory'

Rational choice theory assumes that all people try to actively maximize their
advantage in any situation and therefore consistently try to minimize their losses.
The theory is based on the idea that all humans base their decisions on rational
calculations, act with rationality when choosing, and aim to increase either
pleasure or profit. Rational choice theory also stipulates that all complex social
phenomena are driven by individual human actions. Therefore, if an economist wants
to explain social change or the actions of social institutions, he needs to look at
the rational decisions of the individuals that make up the whole.
Arguments Against Rational Choice Theory
However, many economists do not believe in rational choice theory. Dissenters have
pointed out that individuals do not always make rational utility-maximizing
decisions. For example, the field of behavioral economics is based on the idea that
individuals often make irrational decisions and explores why they do so.

Additionally, Nobel laureate Herbert Simon proposed the theory of bounded

rationality, which says that people are not always able to obtain all the
information they would need to make the best possible decision. Further, economist
Richard Thaler's idea of mental accounting shows how people behave irrationally by
placing greater value on some dollars than others, even though all dollars have the
same value. They might drive to another store to save $10 on a $20 purchase, but
they would not drive to another store to save $10 on a $1,000 purchase.

An Example Against Rational Choice Theory

While rational choice theory is clean 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 24, 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, when the United Kingdom officially
decided to leave the European Union. The financial markets then responded in kind
with shock, wildly increasing short-term volatility, as measured by the CBOE
Volatility Index (VIX).

Further, research conducted by Christopher Simms of Dalhousie University in

Halifax, Canada, shows that when people are anxious, they fail to make rational
decisions. Stressors that produce anxiety have been shown to actually suppress
parts of the brain that aid in rational decision-making.

Trading Center

NEXT UP
Rational Choice Theory Rational Expectations Theory Rationing Rational
Behavior Capital Rationing Paradox of Rationality Rationalization Financial
Economics Neoclassical Economics Social Choice Theory

Rational Expectations Theory + SUBSCRIBE

SHARE
The rational expectations theory is an economic idea that the people make choices
based on their rational outlook, available information and past experiences. The
theory suggests that the current expectations in the economy are equivalent to what
people think the future state of the economy will become. This contrasts with the
idea that government policy influences people's decisions.

BREAKING DOWN 'Rational Expectations Theory'

The rational expectations theory is often used to explain expected rates of
inflation. For example, if inflation rates within an economy were higher than
expected in the past, people take that into account along with other indicators to
assume that inflation may further increase in the future.
The rational expectations theory also explains how producers and suppliers use past
events to predict future business operations. If a company believes that the price
for its product will be higher in the future, for example, it will stop or slow
production until the price rises. Since the company weakens supply while demand
stays the same, the price will increase. The producer believes that the price will
rise in the future and makes a rational decision to slow production, and this
decision partially affects what happens in the future. By relying on the rational
expectations theory, companies can inadvertently effect future inflation in an
economy.

Read More +

Search Investopedia

DICTIONARY: # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
CONTENT LIBRARY
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NEW Academy

Rational Choice Theory + SUBSCRIBE

SHARE

10 DAYS HAIR OIL - 3000 HAPPY CUSTOMERS & 100+ REVIEWS.

SPONSORED BY RATHIRA AYURVEDA

What is the 'Rational Choice Theory'

Rational choice theory is an economic principle that states that individuals always
make prudent and logical decisions. These decisions provide people with the
greatest benefit or satisfaction given the choices available and are also in
their highest self-interest. Most mainstream academic assumptions and theories are
based on rational choice theory.

BREAKING DOWN 'Rational Choice Theory'

Rational choice theory assumes that all people try to actively maximize their
advantage in any situation and therefore consistently try to minimize their losses.
The theory is based on the idea that all humans base their decisions on rational
calculations, act with rationality when choosing, and aim to increase either
pleasure or profit. Rational choice theory also stipulates that all complex social
phenomena are driven by individual human actions. Therefore, if an economist wants
to explain social change or the actions of social institutions, he needs to look at
the rational decisions of the individuals that make up the whole.
Arguments Against Rational Choice Theory
However, many economists do not believe in rational choice theory. Dissenters have
pointed out that individuals do not always make rational utility-maximizing
decisions. For example, the field of behavioral economics is based on the idea that
individuals often make irrational decisions and explores why they do so.

Additionally, Nobel laureate Herbert Simon proposed the theory of bounded

rationality, which says that people are not always able to obtain all the
information they would need to make the best possible decision. Further, economist
Richard Thaler's idea of mental accounting shows how people behave irrationally by
placing greater value on some dollars than others, even though all dollars have the
same value. They might drive to another store to save $10 on a $20 purchase, but
they would not drive to another store to save $10 on a $1,000 purchase.

An Example Against Rational Choice Theory

While rational choice theory is clean 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 24, 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, when the United Kingdom officially
decided to leave the European Union. The financial markets then responded in kind
with shock, wildly increasing short-term volatility, as measured by the CBOE
Volatility Index (VIX).

Further, research conducted by Christopher Simms of Dalhousie University in

Halifax, Canada, shows that when people are anxious, they fail to make rational
decisions. Stressors that produce anxiety have been shown to actually suppress
parts of the brain that aid in rational decision-making.

Trading Center

NEXT UP
Rational Choice Theory Rational Expectations Theory Rationing Rational
Behavior Capital Rationing Paradox of Rationality Rationalization Financial
Economics Neoclassical Economics Social Choice Theory

Rational Expectations Theory + SUBSCRIBE

SHARE
The rational expectations theory is an economic idea that the people make choices
based on their rational outlook, available information and past experiences. The
theory suggests that the current expectations in the economy are equivalent to what
people think the future state of the economy will become. This contrasts with the
idea that government policy influences people's decisions.

BREAKING DOWN 'Rational Expectations Theory'

The rational expectations theory is often used to explain expected rates of
inflation. For example, if inflation rates within an economy were higher than
expected in the past, people take that into account along with other indicators to
assume that inflation may further increase in the future.
The rational expectations theory also explains how producers and suppliers use past
events to predict future business operations. If a company believes that the price
for its product will be higher in the future, for example, it will stop or slow
production until the price rises. Since the company weakens supply while demand
stays the same, the price will increase. The producer believes that the price will
rise in the future and makes a rational decision to slow production, and this
decision partially affects what happens in the future. By relying on the rational
expectations theory, companies can inadvertently effect future inflation in an
economy.

Read More +

Search Investopedia

DICTIONARY: # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
CONTENT LIBRARY
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Analysis Stock Simulator FXtrader Exam Prep Quizzer Net Worth Calculator
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