Slideshow 1 - Knowledge, Rationality, Choice

What is Rational Choice Theory?

A decision-making model where individuals choose the option with the highest utility using cost–benefit logic and known probabilities.

What is Expected Utility?

A theory that people choose between risky options by calculating the probability-weighted value of each outcome.

What does “risk-averse” mean?

Preferring a certain gain over a gamble with equal or higher expected value.

What does “risk-neutral” mean?

Indifference between certain and risky options with equal expected value.

What does “risk-acceptant” (risk-seeking) mean?

Preferring a gamble over a certain outcome with equal expected value.

What is Cost-Benefit Analysis (CBA)?

Comparing all costs and all benefits of alternatives and choosing the option with the greatest net gain.

One major critique of Rational Choice Theory?

Assumes perfect information, perfect rationality, and stable preferences (unrealistic).

What is the “Paradox of Voter Turnout”?

RCT predicts people shouldn’t vote because costs exceed benefits, yet people still vote.

What are Green & Shapiro’s “Pathologies of Rational Choice”?

Post-hoc theory development, vague predictions, selective evidence, projecting evidence from theory, arbitrary domain restrictions.

What is instrumental rationality?

Action based on efficiency and maximizing outcomes.

What is value rationality?

Action motivated by values or principles, not outcomes.

What is affective rationality?

Action driven by emotions.

What is traditional rationality?

Action based on habit or routine.

What is Bounded Rationality?

The idea that people make decisions under limits of information, time, and cognitive ability.

Why was Bounded Rationality developed?

Because real-world decision-making is too complex, slow, and constrained to fit Rational Choice Theory.

What is “satisficing”?

Choosing the first option that meets an acceptable threshold (aspiration level).

What are “aspiration levels”?

Performance benchmarks or acceptable goals that guide decision-making.

What are cognitive bounds?

Limits on human ability to process information and compute options.

What are motivational bounds?

Situations where people know the rational choice but fail to act on it due to emotions, impulses, or lack of control.

Name two “real processes” observed in business decision-making.

Searching, filtering, evaluating, transmitting information, compromising.

What is Prospect Theory?

A psychological theory showing that people evaluate decisions based on gains and losses relative to a reference point, not total utility.

What is a reference point?

The baseline (starting point) from which gains and losses are evaluated

What is the reflection effect?

People are risk-averse for gains and risk-seeking for losses.

What is loss aversion?

Losses feel more painful than equivalent gains feel good.

What is the framing effect?

Decisions change depending on how information is presented.

What is the certainty effect?

People overweight outcomes that are guaranteed compared to merely probable ones.

What is the isolation effect?

People ignore parts of options that are identical and focus only on differences.

The two phases of Prospect Theory?

Editing phase and evaluation phase.