EXPECTATION

A. Content Standards
The learners demonstrate an understanding of the key concepts and approaches in the
Social Sciences.
B. Performance Standards
The learners shall be able to:
 Interpret personal and social experiences using relevant approaches in the Social
Sciences and;
 Evaluate the strength and weaknesses of the approach
C. Most Essential Learning Competency
 Analyze the basic concepts and principles of rational choice theory
 Apply the idea of rational choice theory and its importance in examining socio-
cultural, economic, and political conditions.
1. Learning Objectives:
At the end of the module, the students will be able to:
 Define rational choice theory
 Relate the Nash Equilibrium Rational Choice theory
 Discuss the importance of rational choices of individuals in the society as a
whole.

PRE-TEST

A. Write “True” if the statement is true and write “False” if the statement is false.
______________1. Rational choice theory asserts that individuals use random calculations to
achieve outcomes.
______________2. Methodological individualism holds that society determines every
individual human’s action.
______________3. Institutions are by products of every individual’s action according to
Rational Choice theory.
______________4. Strong institutions include the international organizations.
______________5. Purely cooperative games are beneficial for both players.
______________6. A prisoners’ dilemma is a type of game in which both players are worse
off or in a less advantageous position because either player has no
incentive to change their strategy.
______________7. The rational actors or agents are described by their unchanging sets of
preferences over all imaginable outcomes.
______________8. Self-interests always lead to negative outcome according to Adam Smith.

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______________9. Rationality assumption is the attempt of many economists to understand
certain behaviors of society as a whole by using rational actors as the
basis for rational choice theory.
______________10. Trade-offs must be related to both the goals and the means to attain it
according to rational choice theory.

LOOKING BACK

A. How does the process of bringing the unconscious to the conscious can help the client
solve psychological issues?

INTRODUCTION OF THE LESSON

RATIONAL CHOICE THEORY

Introduction
According to Crossman (2019), economic theories look at how money organizes the
production, distribution and consumption of goods and services through different ways. Rational
choice theorists believe that the same principle can be used to realize the human interactions
when exchanging resources such as time, information, approval and prestige.

What is Rational Choice Theory?

Rational choice theory believes that individuals are motivated by their personal wants
and goals and are driven by personal desires. However, it is not possible for persons to acquire
all the things they want, so they must make “trade-offs” that is related to both their goals and the
means to attain it. The outcomes must be anticipated so to have alternative plans of action to
choose from depending on their calculations. Ultimately, rational individuals choose the plan
that is likely to give them the greatest satisfaction.

For Ganti (2019), rational choice theory states that individuals use rational calculations
to create rational choices so to achieve outcomes that are aligned with their best personal
interests. It is expected that the outcome will provide people with the greatest benefit and
satisfactions provided their choices are available. However, what would be the benefits of
advancing one’s interest to the society as a whole? And what would happen to a society where
everyone is selfish?

Effects of Individualism to Society

This theory distinguishes it from other forms of theory because it asserts that all actions
are purely rational and calculative actions. Central to all forms of rational choice theory is the
assumption that complex social phenomena can be explained in terms of the individual actions

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that lead to such phenomena. This is called methodological individualism, which holds that
the smallest unit of social condition is every individual human’s action (Crossman, 2019). The
rationality assumption is the attempt of many economists to understand certain behaviors of
society as a whole by using rational actors as the basis for rational choice theory. It assumes
that all individuals are expected to be rational actors and are making rational choices to achieve
the best results for themselves and their own interests (Ganti, 2019). Therefore, social
change and social institutions arise as the product of individual action and interactions. Bevir
(2016) said that the theory unpacks social facts, institutions, and patterns of rule entirely by
analyzing the individuals’ actions.

The dominance of individuals in this theory raises issues about the origins, persistence,
and effects of social norms, laws, and institutions that govern the individual. How can we explain
the rise and stability of a pattern of rule that is occurring in an individual (micro level) even in the
absence of any higher authority to enforce it?

Rational Choice and the Institutions

Rational choice theorists generally conclude that for the authority to be effective even in
their absence, such institutions have to be conceived as self-enforcing. But what then is the
effect of norms, laws, and institutions on the individuals’ actions? The Rational choice theorists
argue that the institutions structure people’s strategic interactions with one another.
When an institution is stable, it influences individuals’ actions by giving them reasonable
expectations on the outcome of their chosen action. An example of this is when students do
their assignments even when the teacher is not around because it is expected that doing so will
result to a rewarding grade and doing the other way around will result to lower mark or failure.
On the other hand, if the institution is weak, people tend to break agreements on the absence of
the authority thus creating instability. Examples of weak institutions include the international
organizations. One event is the arbitration rule on the dispute in the West Philippine Sea which
resulted to favor the Philippines. In spite of that, China pursued its reclamation projects.

Self-Interest and the Invisible Hand

Adam Smith was one of the first economists to develop the ideas of rational choice
theory through his studies of self-interest and the invisible hand theory which he discussed
through his book “An Inquiry into the Nature and Causes of the Wealth of Nations”, published in
1776. The invisible hand theory is based on self-interest, rationality, and the rational choice
theory, which refutes negative misconceptions about self-interest and suggests that self-
interests of the rational actors can actually create positive benefits for the whole economy.
Economists who believe in this theory lobby for less government intervention and advocates
more free-market exchange opportunities.

Elements and Structure

The rational actors or agents are described by their unchanging sets of preferences over
all imaginable outcomes. If an agent reflected on the relationship of superiority, inferiority, or
indifference among all pairs of choice and ordered all of it logically, then we can say that the

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agent completed the preferences therefore the agent is rational. In addition, for choices in which
the outcomes are possibly risky or uncertain, rational agents still exhibit consistencies among
their choices.

Everyone’s choices reflect internal consistency required by the axioms of rational choice.
Actors’ ranking of preferences may include all considerations relevant to choice such as
attitudes toward risk, resentment, sympathy, envy, loyalty, love, and a sense of fairness. Since
social scientists have indirect access to agents’ inner thoughts, researchers can only infer back
from the observed behavior of the agent to reconstruct the preference hierarchy.
For example, when you choose school for college, you set preferences and arrange them based
on which one you think is best or second best maybe because your friend is there, the
professors are excellent, near your residence or due to your economic condition. Even when
you are uncertain about your preferred choices, you are still consistent about the reasons that
those schools are your choices. Therefore you are rational.

Game Theory
Rational choice theory is a fundamental element of game theory. A game is any
interaction between multiple people in which each person’s payoff is affected by the decisions
made by others (SciShow, 2016). Game theory assumes that agents are all rational players who
are aware of each other’s preferences and strategies. A strategy is the game plan each will
implement that best fits individual preferences while considering the specific structural
contingencies of the game. The contingencies are the probabilities that include the number of
game plays, the sequential structure of the game, probably forming coalitions with other players,
and the other players’ preferences over outcomes.

Social scientists classify games into three groups to explain, model and predict collective
outcomes:
 Purely cooperative games in which players prefer and jointly benefit from the same
outcomes;
 Purely competitive games in which one person’s gain is another’s loss;
 Mixed games, including the prisoner’s dilemma which involves varied motives of
cooperation and competition.

Prisoners’ Dilemma
A prisoners’ dilemma is a type of game in which both players are worse off or in a less
advantageous position because either player has no incentive to change their strategy. This
condition is known as the Nash equilibrium. It is named after American Economist John
Nash (1928-2015), a solution to a non-cooperative game where players, knowing the playing
strategies of their opponents, have no incentive to change their strategy.

The prisoners’ dilemma is a classic example of a game which involves two suspects, Let
us say prisoner “A” (is you) and prisoner “B” (is your partner), arrested by police while fleeing

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from the scene. The investigators want to know more and offered each of you to confess. If you
confess to the crime but the other does not, you will get immunity (0 years in prison), but your
partner who does not confess will serve 10 years and vice versa. If neither of you confesses,
both of you will get lighter terms of 2 years; but if both of you confess, both of you shall serve 5
years. The game’s choices and potential consequences can be visualized using the matrix
below:

Prisoner Partner “B” (Your Partner)

Payoff in prison terms
Confess Do Not Confess
Prisoner “A” Confess 5 5 0 10
(You) Do Not Confess 10 0 2 2

The combined optimal strategy for both prisoners is not to confess because doing so
would result in the minimum prison term of 2 years for both of you. But how can you be sure that
your partner will do the same? Since you can’t communicate and cooperate, one must attempt
to do the best choice individually. If you will not confess and your partner does confess, you will
end up serving 10 years in prison while your partner is free. There is no guarantee that your
partner shall not take advantage. Since each prisoner is worse off or in a less advantageous
position, the dominant strategy for you is to confess. Chances are you will serve 5 years if both
of you confess; and be freed if your partner do not confess.

Nash Equilibrium in Prisoners’ Dilemma

Nash equilibrium is a combination of strategies where each player has no any incentive
to unilaterally change its strategy. When each player has dominant strategies, the intersection of
the dominant strategies or its outcome is called Nash equilibrium. In the prisoners’ dilemma, the
dominant strategy for each prisoner is confessing, so the Nash equilibrium occurs when both
confess. It is Nash equilibrium because each prisoner has no incentive by unilaterally changing
its strategy. For example, if one prisoner decides to not confess while the other one does, the
one who does not confess will have to stay for 10 more years. Therefore, it is worse off to move
away from what is dictated by the Nash equilibrium. This shows that Nash equilibrium is self-
reinforcing and stable.

Even though the prisoners’ dilemma discussed above is an abstract concept, many real-
life situations closely resemble it particularly in economics and in business. For example:

 Two soap companies know that if they don’t advertise, they can maintain their existing
market share and save advertisement budget as additional profit, but because each firm
fears that if the other firm continued advertising, it would lose the market share. Because
both firms are experiencing the same fear, both of them advertise, thereby lowering their
profits.
 Let us say there are two oil companies selling similar oil products. They are better off
when both charge a high price; each makes a high profit per month. If one become

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 honest and lowered its price, it wins a lot of customers away from the rival. Making the
firm earn more while the other is losing. If both set low prices, the profit for each firm
lowers per month. Here, the low-price strategy or honesty becomes the dominant
strategy, but the result is worse for each than when both are cooperating.

ACTIVITY

A. Identification
1. It is the attempt of many economists to understand certain behaviors of society as a
whole by using rational actors as the basis for rational choice theory.
2. It is when individuals use rational calculations to create rational choices so to achieve
outcomes that are aligned with their best personal interests.
3. It refutes negative misconceptions about self-interest and suggests that self-interests
of the rational actors can actually create positive benefits for the whole economy.
4. It is the intersection of the dominant strategies or its outcome because there is no
incentive in changing the strategy.
5. It assumes that agents are all rational players who are aware of each other’s
preferences and strategies.
B. Calculate the Best Choice
1. Divide the class into 5 groups. Create a “price over quality” and “quality over price”
scenario where an individual shall base his/her calculations from and write it under the
column Rational Calculations. You will choose what products to sell/buy based on the
scenario you made and write it under the column rational choices. In the column Best
Personal Interests, you will write the benefit of the sellers/consumers on your product
considering all the information to be calculated in the first column.

Rational Calculations Rational Choices Best Personal Interests

Price Over
Quality
Quality Over
Price

Example:
As a buyer: the benefit of
used clothes can save
The economy is too Ukay vs. Branded/ money but I need to look
Quality Over low and there is Food vs. Looks/ good for my business etc.
Price massive Business Looks with this scenario, the best
unemployment vs. Budgeting decision is to buy…

As a seller: I will try…

C. Dilemma
1. Create an actual scenario in economics/business that uses “prisoner’s dilemma” using
the matrix below. Below the table, explain the content of your matrix.

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 Team “B” (Rename)
Payoff Negative
Affirmative Decision
Decision
Team “A” Affirmative
Decision
(Rename)
Negative Decision
2. Choose 2 of your members to present your outputs for activity letter B and C

REMEMBER

Rational choice theory is based on the assumption that individuals choose a course of
action that is most in line with their personal preferences to get the greatest satisfaction. It is
used to model human decision-making to help the economists better understand the behavior of
a society in terms of rational individual actions. These individual actions are structured by the
institutions but vary depending on the stability of the institution. Rational choice happens when a
person sets calculates preferences based from all the available information. Game theory is an
example of rational choice as every player considers the contingencies of the game. Prisoner’s
dilemma is one example of game theory which involves varied motives of cooperation and
competition.

CHECKING YOUR UNDERSTANDING

A. Let’s Apply it to Economy, Culture, Society and Politics

1. In spite of the shopping mall provide so many choices, its earnings is capped at a
certain level because the population of the consumers is no longer increasing. What is
the best solution of the mall CEO should suggest to the mall owner to increase its
profit?
2. In times of National Crisis like CoViD19, is it possible that we can still solve the health
crisis, the market needs and food shortages, all at the same time, if we will still hold on
less government intervention and maintain the free-market system? Explain your
answer.
3. In the policy making, what is the possibility that a lawmaker can still get the best
possible decision on times when it is impossible to obtain all the information to
calculate from?
4. If all individuals simply base their actions on calculations of personal profit, why would
they ever choose to do something that will benefit others more than themselves (e.g.
selfless, altruistic, or philanthropic)?

POST TEST

A. Write the letter of the correct answer on the answer sheet provided at the end of this module
1. What motivates individuals according to Rational Choice theory?

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 a. Choices b. Desires c. Other people d. Wants and Goals
2. It is the act of choosing the best satisfaction but must be related to the goals and the
means to attain it.
a. Elements b. Opportunity Cost c. Structure d. Trade Offs
3. It is the assumption that all individuals are rational actors because they make rational
decisions to achieve the best results for themselves and their own interests.
a. Rational Actors c. Rational Calculations
b. Rationality Assumption d. Rational Choice
4. What makes authority of institutions still effective even on their absence according to
rational choice theorists?
a. Authoritative b. Charisma c. Legality d. Self-enforcing
5. Where researchers do based their inferences to reconstruct the preference hierarchy of an
individual?
a. Axioms b. Observed behavior c. Personal plans d. Sympathy
6. They are the agents of rational theory who have unchanging sets of preferences over all
imaginable outcomes.
a. Actors b. Economists c. Institutions d. Theorists
7. The theory that is based on self-interest, rationality, and the rational choice theory which
says that self-interests can create positive results.
a. Institutionalism b. Invisible Hand c. Psychoanalysis d. Rational Choice
8. A type of game in which players are worse off or in a less advantageous position because
either player has no incentive to change their strategy
a. Competitive games c. Cooperative games
b. Game Theory d. Prisoners Dilemma
9. Theories that look at how money organizes the production, distribution, and consumption
of goods and services through different ways.
a. Economic b. Political c. Social d. Rational
10. How do individuals create rational choices based from available information to achieve
best outcomes according to Ganti?
a. Calculates Info. b. Choose Info. c. Desires Result d. Establish Goal

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 REFERENCES:

Amadae, S. M. (2017, November 17). Rational Choice Theory. Encyclopædia Britannica, inc.
Retrieved from: [Link]

Bevir, M. (2016, May 23). Governance. Encyclopædia Britannica, inc. retrieved from
[Link]

Crossman, A. (2019, January 21). Rational Choice Theory. Retrieved from

[Link]

Dixit, A. & Nalebuff B. (n.d.) Prisoners’ Dilemma. Retrieved from

[Link]

Ganti, A. (2019, September 29). Rational Choice Theory. Retrieved from

[Link]

Obaidullah, J. (2019, March 27). Game Theory. Retrieved from

[Link]

Rosking, M.G. (2016, April 06). Political Science. Encyclopædia Britannica, inc. Retrieved from
[Link]

SciSchow. (2016, September 29). Game Theory: The Science of Decision-Making. [Video File].
Retrieved from [Link]

Spaniel, W. (2012, September 01). Gametheory101. Retrieved from

[Link]

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ANSWER SHEET FOR DISS Q2 Week 1
Name: __________________________________
Grade & Section: __________________________________
A. Identification
1. 4.
2. 5.
3.
B. Calculate the best choice

Rational Calculations Rational Choices Best Personal Interests

Price Over
Quality
Quality Over
Price
C. Dilemma

Team “B” (Rename)

Payoff Negative
Affirmative Decision
Decision
Team “A” Affirmative Decision
(Rename) Negative Decision
Explanation for Activity C’s Dilemma Table
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________

Checking Your Understanding

A. Economic Assessment
1. ______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
2. ______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
3. ______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
4. ______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
Post Test

1. 6.
2. 7.
3. 8.
4. 9.
5. 10.

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