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What is rational behaviour?

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Rational behaviour definition describes a decision-making process that is centred on choosing decisions that provide the highest level of value or utility for an individual. Individuals who exhibit rational behaviour make decisions that provide them with the greatest level of personal satisfaction.

The theory of rational behaviour assumes that people would choose to perform acts that benefit them over behaviours that are neutral or harmful.

The rational behaviour in economics is the basis for the rational-choice theory. According to this theory, a rational person considers all available information, weighs the costs and benefits, and takes enough time to make a utility-maximising decision. The rewards an individual receives for behaving rationally are not always monetary or material in nature. They might also be in the form of non-monetary or emotional advantages.

“Rational choice theory is a well-established tenet in economics that rests on the assumption that people are rational agents. Armed with complete information about their choices, rational individuals will always choose the option that maximises their utility. 
“These ‘maximisers’ approach decision-making with the goal of achieving the best possible decision outcome,” according to Wharton research
“However, behavioral economists contend that the assumption of ‘complete information’ in decision-making is unrealistic, and that human beings often violate the principles of rational choice theory.”

The rational behaviour model seeks to explain the reason people make certain decisions at some point in their life. Let’s explain the rational behaviour meaning using a couple of examples.

Rational behaviour examples

Despite the fact his/her career is on the rise, an executive decides to retire early and start their own firm. After weighing all of the risks and advantages, the executive may conclude that starting his/her own firm provides greater personal non-material fulfilment than staying with the same company and earning a promotion. The executive can be regarded as having set an example based on rational behaviour. 

In this case, depending on one's goals and circumstances, a person's readiness to take on risk or aversion to risk may be considered rational.

Another example of rational behaviour is when an investor decides to invest in a company or project merely because they have favourable thoughts about it, despite the fact that current data suggests it is not a good investment. 

Bounded rationality

Behavioural economists have rigorously disputed the concept of rational behaviour, with many being of the opinion that individuals cannot show fully rational behaviour due to a number of real-world constraints. 

The restrictions include a lack of complete knowledge; a decision-making time limit; and the inability to evaluate every feasible option.

According to Corporate Finance Institute, challenges to rational behaviour are as follow.

  • Individuals have limited capacity to analyse the costs and rewards of a decision precisely.

  • Individuals may pick a decision that is not ideal due to societal standards.

  • People do not always act in their own best interests.

  • Rather than maximising their choice outcomes, people seek to satisfice.

  • People have a strong preference for maintaining the status quo.

  • Individuals' emotional moods may influence the decisions they make at the moment.

  • People with lack of self-control may desire immediate satisfaction.

Because of these real-world limitations, rational behaviour means the individuals only seek to reach an acceptable decision rather than a utility-maximising decision.

According to Wharton Research: “More than half a century ago, Herbert Simon (1955, 1956) introduced a theory that addressed the limitations of human cognition as well as environmental complexities in the decision-making process. He argued that the goal of utility maximisation, as stipulated by rational choice theory, is nearly impossible to achieve in real life. 
“Rather than maximise, people often ‘satisfice’ when making decisions. Satisficers have an internal threshold of acceptability against which they evaluate options, and will choose a decision outcome when it crosses this threshold. Therefore, satisficers are content to settle for a ‘good enough’ option – not necessarily the very best outcome in all respects.”

According to Barry Schwartz, et al., 2002, maximising individuals are more prone to experience lower levels of happiness, optimism, life satisfaction and self-esteem compared to satisficers. In addition, maximising tendencies revealed positive correlation with regret, perfectionism and depression.

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