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https://www.investopedia.com/terms/r/rational- actually create benefits for the economy at
choice-theory.asp large
- Individuals driven by self-interest and
RATIONAL CHOICE THEORY: WHAT IT IS IN
rationality will make decisions that will lead
ECONOMICS, WITH EXAMPLES
to positive benefits for the whole economy
- Individuals use rational calculations to make - Freedom of production and consumption =
rational choices and achieve outcomes that best interests
are aligned with their own personal - Less government intervention and more
objectives free-market exchange opportunities
- Results associated with maximizing an
ADVANTAGES AND DISADVANTAGES
individual’s self-interest
- Outcomes that provide people with the - Individuals do not always make rational,
greatest benefit and satisfaction utility-maximizing decisions; people are
often moved by emotions and external
KEY TAKEAWAYS:
factors (Behavioral Economics)
- Bounded Rationality by Herbert Simon:
 Rational choice theory states that
people aren’t always able to obtain all the
individuals rely on rational calculations to
make rational choices that result in info needed to make the best possible
outcomes aligned with their own best decision
interests. - Richard Thaler’s Mental Accounting: people
 Rational choice theory is often associated place greater value on some dollars than
with the concepts of rational actors, self- others even though all dollars have the
interest, and the invisible hand. same value
 Many economists believe that the factors
associated with rational choice theory are
beneficial to the economy as a whole.
 Adam Smith was one of the first economists
to develop the underlying principles of the
rational choice theory.
 There are many economists who dispute
the veracity of the rational choice theory
and the invisible hand theory.

UNDERSTANDING THE THEORY

- Based on involvement from rational actors:

individuals in an economy who make
rational choices based on calculations and Examples:
available information, form its basis - Rational investors are those investors that
- Rational actors actively maximize their will quickly buy any stocks priced too low or
advantage in any situation trying to short-sell stocks priced too high
minimize their losses - Rational consumer would be a person
- To understand certain behaviors of society choosing between two cars Car B is
as a whole cheaper than Car A so consumer purchases
SELF-INTEREST AND THE INVISIBLE HAND Car B)

- Adam Smith
- Invisible hand theory (unseen forces that
influence a free market economy), assumes
self-interest
- This and RTC refute negative
misconceptions with self-interest; can
 What Are the Strengths of Rational Choice
Theory?

One of the strengths of rational choice theory is the

versatility of its application. It can be applied to
many different disciplines and areas of study. It
also makes reasonable assumptions and
compelling logic. The theory also encourages
individuals to make sound economic decisions. By
making sound economic decisions, it is possible for
an individual to acquire more tools that will allow
What Is Rational Choice Theory? them to further maximize their preferences in the
future.
The key premise of rational choice theory is that
people don’t randomly select products off the shelf. The Bottom Line
Rather, they use a logical decision-making process
that takes into account the costs and benefits of The majority of classical economic theories are
various options, weighing the options against each based on the assumptions of rational choice
other. theory: individuals make choices that result in the
optimal level of benefit or utility for them. Further,
Who Founded Rational Choice Theory? people would rather take actions that benefit them
versus actions that are neutral or harm them.
Adam Smith, who proposed the idea of an Although many criticisms of rational choice theory
"invisible hand" moving free-market economies in exist—because people are emotional and easily
the mid-1770s, is usually credited as the father of distracted, and therefore, their behavior does not
rational choice theory. Smith discusses the always follow the predictions of economic models
invisible hand theory in his book “An Inquiry into —it is still widely applied across different academic
the Nature and Causes of the Wealth of Nations,” disciplines and fields of study.
which was published in 1776.1
https://thedecisionlab.com/biases/loss-aversion?
What Are the Main Goals of Rational Choice authuser=0&fbclid=IwAR1coKjsmH_hBtMeZqt61pd
Theory? hW0kWOcrTC794Qyu2raktazMDzMRSIMGHhL8

The main goal of rational choice theory is to WHY DO WE BUY INSURANCE? LOSS-
explain why individuals and larger groups make AVERSION, EXPLAINED.
certain choices, based on specific costs and
rewards. According to rational choice theory, - A cognitive bias that describes why, for
individuals use their self-interests to individuals, the pain of losing is
make choices that will provide them with the psychologically twice as powerful as the
greatest benefit. People weigh their options and pleasure of gaining
make the choice they think will serve them best. - Common when we make financial decisions
- Loss aversion grows stronger as the stakes
What Is Rational Choice Theory in International
of a choice grow higher
Relations?
INDIVIDUAL EFFECTS
States, intergovernmental organizations,
nongovernmental organizations, and multinational - Impair our decision-making; fear prevents
corporations are all made up of human beings. In us from taking even well-calculated risks
order to understand the actions of these entities, with potential worthwhile returns
we must understand the behavior of the humans - Pertinent to how we spend and manage our
running them. Rational choice theory helps to money
explain how leaders and other important decision-
makers of organizations and institutions make
decisions. Rational choice theory can also attempt
to predict the future actions of these actors. SYSTEMIC EFFECTS
 - Prevent indivs, corps, and countries from - A decision-making process in which an
making risky decisions when addressing individual makes a choice that is
complex challenges but also from satisfactory rather than optimal “good
implementing innovative solutions enough” instead of perfect ones
HOW IT AFFECTS PRODUCT KEY TERMS:

- Impacts inclination to purchase new digital - Optimization/Maximization

devices - Bounded Rationality
- Ecological rationality
LOSS AVERSION AND AI
- Heuristics
- Toward making better decisions - Choice architecture
- Machine learning algorithms approach
HISTORY
dilemmas based on fine-tuned statistical
patterns - Faulty belief that humans are purely rational
WHY IT HAPPENS decision makers
- Emerged from the field of behavioral
- Results from three coinciding components: economics that took into account factors
our neurological makeup, socioeconomic other than maximizing utility in decisions
factors, and cultural background - Satisficing as a tool rather than a deficiency
o Brains: Amygdala (fear), striatum
PEOPLE
(calculating prediction errors and
anticipating events), insula (disgust) - Herbert Simon
o Socioeconomic factors - Gerd Gigerenzer
o Culture - Peter Todd
WHY IT IS IMPORTANT - Daniel Kahneman

- Discourage people from logically evaluating CONSEQUENCES

situations when the fear of losing out is too - User Experience designers: how to satisfy
intense, prevents people from making the humans’ limited attentional capacities;
best decisions possible to avoid failure search engines; food marketing
HOW TO AVOID IT CONTROVERSIES
- Framing - Traditional: satisficing is a deficiency as it
- Putting loss into perspective deviates from perfect rationality
HOW IT ALL STARTED - It is next to impossible to determine what
constitutes a satisfactory choice
- Amos Tversky and Daniel Kahneman - Satisficing and optimizing might also have
- Prospect theory: how individuals decide different goals
between and estiamate the perceived - Effectiveness is context dependent
likelihood of different options
CASE STUDIES
https://thedecisionlab.com/reference-guide/
psychology/satisficing? - Morality
authuser=0&fbclid=IwAR1vElkb1C36bkdlXW5w1ps - How satisficing can improve your dating life
qnUZNk5unwZ5sPgNoLQK3RO_U_4ij8irBO4U
Satisficing https://thedecisionlab.com/reference-guide/
Ex. As a consumer, you are likely to pick a TV that economics/the-paradox-of-choice?
satisfies your criteria out of all the available TV authuser=0&fbclid=IwAR195MFqomw-
options, whether or not it is the absolute best wXn3N8NgSHzP2kE7yGBft8Pxs67VJTMNTKQ0xc
possible option. GXggGgKT4
THE PARADOX OF CHOICE - More oprtions, opportunity costs are greater
and can leave people with more regret
Ex. Having so many choices that you are
- The role of psychology and behavior
overwhelmed and can’t choose what milk to buy
economics is to find the kind of limitations
(fat percentage, source of milk).
on freedom that can lead to the greatest
- Having an abundance of options actually level of happiness within society
requires more effort to make a decision and
Controversy
can leave us feeling unsatisfied with our
choice - Conflicting evidence: Decoy effect suggests
- Having too many choices actually limits our that we feel more strongly about an option
freedom when there are three options than if there
are two
Learning to choose is hard. Learning to choose
- Criticized PoC for not having enough
well is harder. And learning to choose well in a
concrete and scientific evidence (Starbucks
world of unlimited possibilities is harder still,
as countering evidence)
perhaps too hard.
- Conflicting evidence: Single-choice aversion
– Barry Schwartz in his book The Paradox of
(Daniel Mochon) suggests that people are
Choice1
unwilling to choose an attractive option if
there are no alternative options to compare
- Popularized by American psychologist Barry it to
Schwartz (Father of Paradox of Choice): - Schwartz: it is about finding the right
how choices were affecting the happiness of balance between having too many options
citizens in Western societies. and not enough options
- Range of choices available is greater than
The Original Paradox of Choice
the past but consumer satisfaction hasn’t
increased in contrast to the theories - Sheena Iyengar and Mark Lepper (2001):
- America: Freedom associated with choice – Too many options caused consumers to be
greater choice = greater freedom; was less likely to buy a product
actually causing people to be less happy - How the volume of choice impacted
with their decisions consumer behavior
o Fine line between freedom and - 24 options vs 6 options of jam: Having too
being paralyzed with too many many options might actually cause
options someone not to make any decision at all
Consequences Tinder and the Paradox of Choice
- Surface level: might increase customer - People seem less likely to commit or spend
satisfaction as more likely to find one option the necessary quality time getting to know
to fit particular wants and needs, it can be someone since they can just get right back
overwhelming in reality = choice overload on the app
and dissatisfaction
- Internet and social media, fast paced
advances in scitech. New jobs, socmed https://thedecisionlab.com/biases/zero-risk-bias?
apps, dating apps. authuser=0&fbclid=IwAR00tCPMt485SBZ7_2Q4ubj
- Bounded rationality and satisficing of VNdjMsVxvYQPeh0ZLepkE6p87nGi88h8r4b0
Herbert Simon: Schwartz identified Paradox
of choice carries the most consequence for WHY DO WE SEEK CERTAINTY IN RISKY
people that are maximizers (deep regret) SITUATIONS? – Zero Risk Bias
- Maximizers, unlike satisfiers are concerned - Relates to our preference for absolute
with making the best choice instead of the certainty, tend to opt for situations where we
one they are happy with. can completely eliminate risk seeking
 solace in the figure of 0% over alternatives - Risk as feelings hypothesis (Lowenstein et
that may actually offer greater risk reduction al.): possibility is more emotionally salient
- Where it occurs: buying an insurance policy than the probability of an outcome. Emtional
for something u felt was close to impossible, cues relied upon when making decisions
for the peace of mind in knowing we’ve regarding uncertainty and manifest in
eliminated the potential risk mental shortcuts such as the zero risk bias
- Even a 1% chance of disaster can loom
Why it is important
over our conscience and eschewing such a
minute probability and securing that 0% can - Decision making under risk and uncertainty
be a favorable outcome is present in public health, financial markets,
political strategy, security, and business
Individual effects
management
- People chose 5% to 0% decrease in risk - Decisions in these domains can have
over 50% to 25% although the latter has a serious consequences so balancing a public
far greater reduction desire for certainty with real optimal option
- Seduction of certainty can impact a decision is a delicate act
where we erroneously opt for a suboptimal - Acknowledin the zero risk bias relevant to
choice an indivdual’s thought process as well as
- Decisions in the real world are often not as how we might expect such decisions to be
clear cut and defined as in experimental perceived by others
settings
How to avod it
- The concept of having a bias towards a
certain, risk-free option is still pertinent to - Helps to assess decision making process
many and see how much fear or emotional
salience of a potential loss is guiding your
Systemic effects
preference towards a particular choice
- Public opinion: preferences over policies - Prove self on how much the allure of zero
towards terrorism, gun violence, and traffic risk is influencing preferences and whether
accidents it’s more important than a greater reduction
- Public pressures to strive for zero risk may in risk
push policymakers awar from prioritizing
How it all started
overall risk reduction
- Business level: management decisions may - 1987 paper by Viscusi et al.
be influenced. Lot of success in business - Certainty premiums in eliminating risk by
comes from taking risks asking participants how much they would
- Proclivity to exhibit a bias towards pay to reduce the possible risk of side
eliminating risk misses out on major effects from cleaning products
opportunities for growth
Why it happens

- Mental shortcut, narrative is that they

reduce cognitive strain. We opt for the
choice with less effort and uncertainty.
- Loss aversion can help explain the lure of
0%. Prospect Theory by Kahneman and Examples – Allais Paradox, Money back guarantee,
Tversky suggests that losses loom larger
than gains. By completely eschewing risk,
we are eliminating the possibility of a loss, https://thedecisionlab.com/reference-guide/
which can be reassuring enough to become psychology/choice-architecture
more valuable than an increased probability CHOICE ARCHITECTURE
of a gain
 - Thaler: how decisions made by both
individuals and institutions are influenced by
cognitive limitations and biases refuting the
assumption of economic theory that humans
always act rationally and selfishly
o Odentified influences on behavior
such as bounded rationality, social
preferences, and lack of sel f control
o Bridged economic and psychological
analyses of decision making –
expansion of behavioral economics
- Sunstein: worked alongside thaler
- our decisions are influenced by the way that Consequences
choices are presented
- choice architect is someone who creates - Had a large influence on behavioral
the environment that influences decision- economics research and policy ,aking
making - Impactful on significant policy m aking
- consumer decisions are influenced by groups
directing teir attention to a sale which we
associate as good as in example above
- choice arch is related to libertarian
paternalism and nudge theory, which
proposes that positive reinforcement and
implicit suggestions that influence behavior
History

- Thaler and Sunstein in 2008: how insights

from behavioral economics could be used to
influence choices, without changing their
objective values; to minimize biases that
result from bounded rationality.
- Limitations could be overcome if choice
architects nudge humans toward beneficial
choices While Thaler and colleagues provided the first
- Drew inspiration from Norman 1990: detailed account of choice architecture and the six
designers must remember humans are associated principles,1 other behavioral scientists
confronted daily with a multitude of choices divided the “tools” into two categories: (1) those
and cues so products must be designed for that structure the choice task; and (2) those that
ease of use describe the choice options.9 The former addresses
- Thaler and Sunstein aimed to adapt by the issue of what information and options choice
detailing principles of effective choice arch architects should present, and the latter focuses on
to help choice archis better design their env how to present said options. As for describing
to match how humans behave: choice options, choice architects should carefully
divide options into groups and design the attributes
associated with their options.

Controversies

- Libtertarian paternalism is built on the

People foundation that behavior can be influenced
 wo any coercion, the main concern is
whether choice arch is ethical
- Choice archis may only be able to do so by
imposing costs on agency, such as limiting
choices; original design of choices may
threaten autonomy despite them being rfree
to choose
- Leaves people with ffragmented selves
- If people used to being nudged become
passive and tolerable of more controlling
tactis like big brother world
- Nudgins labelled as arationality paradox
that it represents an approach that
emphasizes bounded rationality without
reflecting on its own limits to rationality
- Bounded rationality cant be dismissed on
the basis of having more resources which
leads to the ques of whether such
institutions are in a position to nudge others
through policy

Case Study

- Defaults in organ donation systems

- Save more tomorrow: easy and painless
retirement
-
-
ACTIVITY

Week 7: The Economic Self

Instructions: Write a 150-word integrative reflection essay from the set of reading materials for this week.
Submit it through a pdf file and use the specified format below:
- 12, Arial
- 1.15 spacing, Justified
- Short Bond Paper
File name: Surname, First Name_Year & Section – Week 7 – Integrative Reflection Essay
(Example: Dela Cruz, Juan_OBTEC I-3 – Week 7 – Integrative Reflection Essay)
Note: Your paper will be subjected to similarity test. It must be only within the 25% similarity indices; if your
paper got higher than 25%, the paper may be returned back for further revisions so please keep your original
files intact.
The deadline of submission is on or before Friday, November 17, 2023 (11:59 pm) through our ePNU.
Guidelines in Writing an Integrative Reflection Paper

Here are some guidelines in writing an integrative reflection paper:

1. Introduction: Give a brief introduction to the subject you will be thinking about at the outset. Indicate in clear terms
why you are reflecting and what you expect to accomplish by fusing notions with your own experiences.

2. Reflective Process: Explain the self-reflection process you went through. Think about the connections between the
psychological ideas you have learnt and your own experiences and observations. Consider any noteworthy experiences,
feelings, or difficulties you have had, and how they have affected your comprehension of the topic.

3. Integration of Materials: Integrate the theories, concepts, and research with your own experiences to show that you
comprehend them. Describe how the course material has changed your outlook on life and how you perceive the world
and other people. Give particular instances from the subjects that relate to your personal experiences.

4. Critical Analysis: Examine the relationships that exist between the ideas and your personal experiences. Think about
the theories or notions' advantages and disadvantages in light of your personal experiences.

5. Application and Practical Implications: Think about how your reflections might be applied in real life. Talk about the
practical applications, interpersonal connections, and personal development of the insights obtained from fusing
personal experiences with the subject. Give instances of how this integration can be advantageous in various settings.

6. Conclusion: Provide a brief synopsis of your thoughts and any fresh ideas or points of view that you discovered during
the integrative process. In your essay, you should highlight the importance of combining psychological information with
personal experiences and how this has affected your comprehension of the subject as a whole.

7. References: Make sure to list down any specific sources or items you cited in your reflection in the references that
comes after the conclusion. (if you used any)

Criteria 4
 Excellent

Content and Relevance The paper clearly and

thoroughly analyzes various
(30%)
aspects of self-awareness and
how the reading materials
from topic coverage influences
The paper demonstrates deep it. It provides deep
critical thinking that engages understanding with solid
with reading materials and meaningful examples and
personal experience. It presents demonstrates an overall strong
a clear and insightful account of and well-structured reflection.
self-awareness and personal
growth in relation to the
concepts covered in the topic.
Personal experiences are
carefully considered and
meaningfully integrated with
course material.

Organization and Clarity of The paper is well-organized

Ideas with a clear and concise
structure that allows for easy
(20%)
reading and comprehension.
The writing is eloquent and
sophisticated, presenting a
The paper has a coherent logical seamless argument
structure with a thoughtful throughout.
introduction, body, and
conclusion. Ideas are well-
organized and easy to follow;
transitions between paragraphs
are well-structured.

Integration and Conclusion The paper states a clear and

solid integration of various
(25%)
important concepts and comes
up to acceptable conclusions
from the set of reading
The paper emphasizes materials
integration of important
concepts from the set of reading
materials and provides logical
and relevant conclusions.

Creativity and Originality The paper is presented with an

imaginative perspective from
(15%)
the relevant aspect of the topic
that makes it stand out and
unique. The paper creatively
The paper presents a creative,
taps into topic concepts by
unique perspective on the topic
presenting an exciting
that goes beyond an ordinary
approach. The writing presents a perspective that draws both
fresh perspective on the novelty and uniqueness.
relationship of the student with
the topic as it relates to self-
understanding and growth.
Creative or original ways to
present the reflection paper are
significantly expressed.

Technicalities or Mechanics of The paper is correctly written,

Writing lacking any errors in grammar,
syntax, and spelling. It strictly
(10%)
follows the word number
restrictions and conventions
provided.
The paper is devoid of
grammatical and spelling errors.
The paper follows academic
standards of citation, format,
and style. The paper is concise,
clear, and straightforward to
read.