A Primer on Decision Making: How Decisions Happen

Chapter One
Limited Rationality
By far the most common portrayal of decision making is one that interprets action as rational choice. The idea is as old as thought about human behavior, and its durability attests not only to its usefulness but also to its consistency with human aspirations. Theories of rational choice, although often elaborated in formal and mathematical ways, draw on everyday language used in understanding and communicating about choices. In fact, the embedding of formal theories of rationality in ordinary language is one of their distinctive features. Among other things, it makes them deceptively comprehensible and self-evident. This chapter examines the idea of rational choice and some ways in which theories of limited rationality have made that idea more consistent with observations of how decisions actually happen.
1.1 The Idea of Rational Choice
Like many other commonly used words, "rationality" has come to mean many things. In many of its uses, "rational" is approximately equivalent to "intelligent" or "successful." It is used to describe actions that have desirable outcomes. In other uses, "rational" means "coldly materialistic," referring to the spirit or values in terms of which an action is taken. In still other uses, "rational" means "sane," reflecting a judgment about the mental health displayed by an action or a procedure for taking action. Heterogeneous meanings of rationality are also characteristic of the literature on decision making. The term is used rather loosely or inconsistently.
In this book, "rationality" has a narrow and fairly precise meaning linked to processes of choice. Rationality is defined as a particular and very familiar class of procedures for making choices. In this procedural meaning of "rational," a rational procedure may or may not lead to good outcomes. The possibility of a link between the rationality of a process (sometimes called "procedural rationality") and the intelligence of its outcomes (sometimes called "substantive rationality") is treated as a result to be demonstrated rather than an axiom.
1.1.1 The Logic of Consequence
Rational theories of choice assume decision processes that are consequential and preference-based. They are consequential in the sense that action depends on anticipations of the future effects of current actions. Alternatives are interpreted in terms of their expected consequences. They are preference-based in the sense that consequences are evaluated in terms of personal preferences. Alternatives are compared in terms of the extent to which their expected consequences are thought to serve the preferences of the decision maker.
A rational procedure is one that pursues a logic of consequence. It makes a choice conditional on the answers to four basic questions:
1. The question of alternatives: What actions are possible?
2. The question of expectations: What future consequences might follow from each alternative? How likely is each possible consequence, assuming that alternative is chosen?
3. The question of preferences: How valuable (to the decision maker) are the consequences associated with each of the alternatives?
4. The question of the decision rule: How is a choice to be made among the alternatives in terms of the values of their consequences?
When decision making is studied within this framework, each of these questions is explored: What determines which alternatives are considered? What determines the expectations about consequences? How are decision maker preferences created and evoked? What is the decision rule that is used?
This general framework is the basis for standard explanations of behavior. When asked to explain behavior, most people "rationalize" it. That is, they explain their own actions in terms of their alternatives and the consequences of those alternatives for their preferences. Similarly, they explain the actions of others by imagining a set of expectations and preferences that would make the action rational.
A rational framework is also endemic to theories of human behavior. It is used to understand the actions of firms, marriage partners, and criminals. It underlies many theories of bargaining, exchange, and voting, as well as theories of language and social structure. Rational choice processes are the fundamentals of microeconomic models of resource allocation, political theories of coalition formation, statistical decision theories, and many other theories and models throughout the social sciences.
1.1.2 Rational Theories of Choice
Within rational processes, choice depends on what alternatives are considered and on two guesses about the future: The first guess is a guess about future states of the world, conditional on the choice.