Derek Bannister

Prakhar Misra
August 3, 2017
The Shortcomings of Rational Choice Theory

Economics is often an imperfect science, as evidenced by the Rational Choice Theory

and its application to reality. There are three conditions that must be met in order to satisfy the

Rational Choice Theory: monotonicity, transitivity, and completeness. These conditions make

modeling human behavior and economic decisions relatively straightforward, because people

will optimize their outcomes whenever possible. Unfortunately for economists, people do not

act as perfectly rational beings. Specifically, human actors do not always prefer more over less

or know all of their options and preferences when it comes to consumption. In these ways, the

rational choice theory is significantly limited when it comes to its application to real human

behavior.

The first condition that must be fulfilled to satisfy the Rational Choice Theory is

monotonicity. Monotonicity is the idea that, when modeling human behavior, more is better.

This condition is important in modeling behavior by differentiating preferences in a fairly

straightforward matter. For example, if a consumer is given the choice between a bundle of

three pieces of pizza and two pieces of chocolate or a bundle of four pieces of pizza and two

pieces of chocolate, the consumer should pick the second bundle because it there is more

pizza. In theory, this idea makes sense and is simple to model, but there are many times when

more isnt always better. If someone was to eat three slices of pizza, they may find that they are

completely full and couldnt eat another slice. Monotonicity states, however, that this person

would always want that fourth piece. In reality, that fourth piece may just make that person
sick, which certainly is not preferable to not feeling sick. The shortcomings of the Rational

Choice Theory do not end there.

The idea of completeness is also very difficult to meet in reality for a variety of reasons.

Completeness means that someone knows all of their options and preferences in any given

circumstance. Once again, completeness allows for a level of ease in economic models, but is

not often the case in actuality. If someone were forced make a decision in a short amount of

time, for example, they wouldnt have enough time to gather all of the information about every

possible option. When a parent finds their child injured and in need of emergency care, they

may choose to head to a Hospital A instead of Hospital B, even if Hospital B is less expensive,

because he or she didnt have the time to research the options. In other cases, information may

not be available to a consumer. If someone is interested in knowing the costs of making a

particular product say, a shirt in order to make sure the final price was reasonable, that

information would not be available for obvious reasons. This consumer would be left to decide

on the purchase without complete information about the cost of the production of the shirt.

The lack of complete information in the real world led to the trading and eventual failure of

junk mortgage-backed securities of which the contents were often unknown or not fully

understood ultimately leading to a global recession.

The rational choice theory is immensely helpful in allowing economists to model human

behavior in a way that often makes theoretical decision clear and obvious. The reality of human

decision making, unfortunately, is not so straightforward. People often do not prefer more over

the same amount or less, and they certainly do not always have all of the information about a

product available. For these reasons, the Rational Choice Theory does not always mirror reality.