Rational Choice Theory

Intellect and emotion are two major realms inside a human body, where each one directly or indirectly affects the other. This forms the basis of our core existence, and forms the psychosocial aspect of our being. Economics, believes in the Rational Choice Theory, which proposes all decisions taken by people are based on maximizing profit, thereby having a rational consistency and deliberation.

Law on the other hand believes that people make reasonable decisions, with little or no correlation to the Rational Choice Theory of microeconomics. If we critically evaluate the use of rationale over reason in our daily life, it can be highlighted that not all situations in our daily life are quantifiable. All situations are not of an economic nature, involving money or currency as a measurable medium for comparison among different actions. Marriage, for example, is a non-economic situation. Rationale choices emphasize on weighing situations intellectually, wherein logic governs the decision making with out possessing a moral virtue.

Reasonable decisions require people to be objective, dividing not just logically but also keeping a moral or a non-moral situation in mind: Law requires impartiality and objectivity in a situation by evaluating how people would be affected by the possible chosen action. On the other hand the view of noble laureate, economist, Amartya Sen impresses on a person to prefer the greater value to the lesser’ and ‘ maximize Value’ in every situation. Let’s take a situation in which to maximize his positive position a partnership firm, Partner A is concerned on taking his partner, B’s share and become a monopolist. Rationale thinking would prompt A to just focus on taking B’s share by any means and not evaluate the means. Whereas, the judiciary would want A to decide, keeping acceptable norms in mind. Law points out that ego and altruism needs to be checked, and emphasis should be on the ownership of ‘pains’ and pleasures’ that are directly or indirectly caused to others by decision making. Thus, more stress is laid on ‘reason’ than rationale’.

Economist, Thomas. S. Ulen proposes that in an economic situation, there is a clear absence of human flesh and bone elements of feelings, morale understanding, consideration etc. Decisions are taken merely keeping the goals of maximizing profits in mind. It is a relatively more straight forward and transparent situation in which more often there is an optimum decision, with gains as the prime focus.

Law on the other hand ,governs moral values and promotes decisions to be made on acceptable norms set by society, based on will as well as basic humane pillars of beliefs, emotion and attitudes on which one acts to benefit both parties. Law scholar W.M. Sibley in his Philosophical Review States that Law requires people to involve justificatory equation, weighing pros and cons of every situation, keeping in mind the viability of the decision making not only in the context of optimizing growth but also in our societal existence. Thus legal scholars hold norms based on intellect and beliefs in high regard, requiring people to be reasonable decision makers while economists believe that intellect alone governor decision making, assuming that we are merely rational in every situation.

The act of choice is in fact not a very simple task. It involves the decision maker to think about what he/ she will do and give a valid reasoning of the choice made. Here, I would like to quote from a journal by Amartya Sen that; “A Chooser may have to balance conflicting consideration to arrive at a reflected judgment, may not, in many cases be able to converge on a complete ordering when the point of decision comes. If there is no escape from choosing a choice will have to be made even with incompleteness in ranking.” Economists base their act of choice heavily on the rational choice theory, and have adopted it as their model of decision making. According to this theory a person has a clear objective of his goal, and chooses the means to effectuate his goals, by choosing the one that helps in maximizing the outcome. All human behavior is directed at utility maximization and all that is preferred is transitive in nature.

Consider a situation in which a man needs to reach his sick mother who is living at a distance of 120 km, in one hour. In such a situation, the person has two choices one in which he rationally (economic choice) decides to cover the distance at a speed of 120 km/hr. But a reasonable (legal choice) would rather reach his mother late than rather put other people’s lives in danger by over speeding and driving rashly. Thus making a more reasonable (legal) choice than a rational choice, what an economist would expect.

According to another experienced economists, Thomas Ulen, economists find the Rational Choice Theory as a very handy theorem for reaching hypotheses on how market behave. This can be attributed to a few reasons like:

Economists hold the view that this theory is handy in predicting behavior, since the predictions are based on empirical evidence.

Economists believe that, even if while making a choice, there is a slight deviation from the theory it can be explained without having to assume that the deviation is due to reasonable thinking and not rational thinking and not rational thinking.

Economists firmly hold the view that all decisions are anomalous to the Rational Choice theory, and slight amendment to the theory can be made by understand the “snob effect”.

Economists presume that decisions made rationally lead to prosperity in the economic realm and dominate over those that are not made rationally.

The choices people make have two main variables. They can be either menu dependent or chooser dependent; though an individual may not get to choose the alternative that can be present in the menu.

Though economists very rigidly hold the view that people decide according to the rational choice theory, but scholars of other disciplines hold a different opinion. They feel that rational choice theory can be well accepted while making market related choices. But in non-market situations people usually make decisions that are justifiable. Arthur Ripstein, a famous law author in his book “Equality, Responsibility and Law” states that a justified action is considered a reasonable action. As quoted from an eminent writer, John Gardner’s Journal, The mysterious case of the Reasonable person’ states that “a reasonable person is none other than a justified person, that is, a person who is justified in all these aspects of her life that properly call for justification”.

According to law, reasonable action, in a way means nothing else but justifiable action. For example, in a judiciary condition, a murderer can be reasonably saved by justifying why he reacted the way he did. This definitely cannot justify the act of murder, but reasoning can be used to’ justify the circumstances that must have led to the murder. An economist would have analyzed this situation only in terms of maximizing output while law has the element of reasoning it, where actions are analyzed in the light of regard for not only personal interest, but even the interest of others. Take an example of a cardiologist who gets into a situation, where his patient is in emergency with a weak heart. There are two probable choices in front of him, whereby he either chooses to put stents in his heart vessels or send him for an open heart surgery. Here, the doctor realizing the frail condition of his patient makes a rational choice of going for an Angioplasty (stenting) above an open heart surgery because the probability of recovery is much higher in angioplasty for this particular patient, even though surgery was what the diagnosis suggests. Here, the doctor uses the Rational Choice Theory and takes a decision that results in maximum optimization for his patients health.

According to Ripstein, a special; public’ standard of justification exists, that lays down certain standards to be invoked by those who occupy official government posts and are civil servants. Therefore, a person is considered reasonable, if he exhibits behaviors that is not merely justificatory but is of a specific justificatory standard. Ripstein further believes that while making choices certain element of risk taking is involved, adhering to lawful standards, thereby making it probabilistic rather than actuality. Another great thinker, Aristotle, puts forth the idea that in unusual situations, legal rules usually tend to support ideas that cannot be rationally defensive.

Overtime, many scholars of psychology and economics have carried out experimental analysis of how much people make decisions according to the Rational Choice Theory. Thereafter, four areas were identified that raised doubts on the implication of rationale in making choices. These areas are:

People reject situations in which mutually beneficial exchanges are not within universally accepted norms of fairness. This refutes the rational choice theory prediction.

In situations where several stages of bargaining are involved, people usually do not follow rational strategies.

Not all people have similar kind of thinking patterns and due to the difference of cognition; there are deviations in the behavior. This again is defying the predictions made by the theory of rational choice.

Experiments also revealed that in uncertain outcome, people do not make decisions only based on their intellect. Moral beliefs and value system of individuals as well as society as a whole, plays a major role directly or indirectly in a persons life.

Consider the case of a businessman, where he gets a forest land (say Y) to build a sprawling resort. He can optimize and maximize his profits by rationally utilizing the entire stretch of land. But, he is bound by law that prevents him to clear the entire forest cover for construction. He is legally allowed to clear X area of the forest for his construction. Here, he takes a judicious decision and balances between rational (economic) as well as reasonable (law) choice. Instead of making a sprawling resort by clearing the entire forest cover. He clears the permissible area and constructs a vertical structure instead of a horizontal sprawling one. He tends to retain forest in the (Y-X) area and uses it to generate revenue through setting up a solar farm, or, using biomass in the forest cover as fuel. Through rain water harvesting and recycling of water in his hotel, he maximizes revenue from his revenue generating hotel. Due to retaining the forest cover and the non-polluting media, he even gets the benefit of carbon credits. Thus, he uses not just reason or just rationale, but a harmonious balance between economics and law to maximize the output of his project.

Thus, it can be rightfully summarized that people think rationally and use their intellect to pursue all goals, which they aim at, in their behavior vis-à-vis in situations where others are concerned, people act reasonably and are willing to choose their conduct, and based on the consequence their actions will have, on the welfare of others (legal). Thus though law expects people to behave and choose ‘reasonably, and economists tend to assume people to be only rational, it is actually a balance of both that makes people decide. How they would choose therefore, is situation specific and depends on the goals an individual chooses to attain, along with its course of action.

References:

“The Philosophical Review” W.M. Sibley

Journal on “Rational Choice Theory in Law and Economics” Thomas S

Ulen

“Maximization and the act of Choice” Amartya Sen

“The Mysterious Case of the Reasonable Person” John Gardner