The Underwriting Challenges Facing P.S.V. Insurers in Kenya

Rational Choice Theory: An Overview

by

Steven L. Green
Professor of Economics and Statistics
Chair, Department of Economics
Baylor University

Prepared for the
Baylor University Faculty Development Seminar on Rational Choice Theory

May 2002

© 2002, Steven L. Green

It has been said that democracy is the worst form of government except all the others that have been tried.

-Winston Churchill

It seems easy to accept that rationality involves many features that cannot be summarized in terms of some straightforward formula, such as binary consistency. But this recognition does not immediately lead to alternative characterizations that might be regarded as satisfactory, even though the inadequacies of the traditional assumptions of rational behaviour standardly used in economic theory have become hard to deny. It will not be an easy task to find replacements for the standard assumptions of rational behaviour ... that can be found in the traditional economic literature, both because the identified deficiencies have been seen as calling for rather divergent remedies, and also because there is little hope of finding an alternative assumption structure that will be as simple and usable as the traditional assumptions of self-interest maximization, or of consistency of choice.

- Amartya Sen (1990, p. 206)

1. Introduction

Rational Choice Theory is an approach used by social scientists to understand human behavior. The approach has long been the dominant paradigm in economics, but in recent decades it has become more widely used in other disciplines such as Sociology, Political Science, and Anthropology. This spread of the rational choice approach beyond conventional economic issues is discussed by Becker (1976), Radnitzky and Bernholz (1987), Hogarth and Reder (1987), Swedberg (1990), and Green and Shapiro (1996). The main purpose of this paper is to provide an

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