Transcription
In this video of Game of Theories, I’ll introduce rational choice theory. Rational choice theory is the centerpiece of contemporary economic theories of decision making as individuals and organizations. Rational choice theory is also known as the theory of utility maximization or the theory of rational choice. Many popular decision-making approaches, such as data-driven decision making, data-informed decision making, evidence-based decision making, and cost-benefit analysis, have their theoretical roots in the rational choice theory.
In essence, leadership is defined by how leaders make individual decisions and how leaders facilitate groups to make collective decisions. So it is important to understand how a decision is made. First, what is rational choice theory?
As the name suggests, decision makers are rational. Adam Smith, who authored The Wealth of Nations, famously argued that people were rational utility maximizers and economic behavior was motivated by self-interest. What does it mean by rational?
To answer this question, in 1955 Herbert Simon published an article titled “A behavioral model of rational choice” in The Quarterly Journal of Economics. In that article, Simon laid out six elements of a rational choice model. First, a set of alternative options. This is our choice set. Second, the subset of alternative options that a decision maker considers or perceives. This is “our considered” subset of the choice set. The reason we differentiate the considered choice set from the full choice set is that we may make our choice within a set of alternatives more limited than the full choice set objectively available to us. Third, outcome of choice. Here Simon didn’t distinguish between actual outcomes and perceived outcomes. In later models, other scholars differentiated actual outcomes (also knowns as actual utility) from expected outcomes (also knowns as expected utility).
Fourth, a pay-off function. It means we as decision makers place a value or “utility” upon each of the possible outcomes of choice. We can assign points to each of the possible outcomes of choice, such as 5 points for the outcome of hiring Candidate A and 7 points for hiring Candidate B. It doesn’t have to be numerical values. As long as we can order or rank the possible outcomes of choice by our preferences, we should be able to reach a decision. Fifth, information as to which outcomes will actually occur if we choose a particular option. The information could be incomplete. There may be more than one possible outcome if we choose that particular option. It’s just we don’t know or we are unaware of it due to the constraints of our knowledge, skills, and time. Sixth, information as to the probability that a particular outcome will ensue if we choose a particular option. This element is more precise than the element #5. Here it’s the probability that each outcome will occur if an option is chosen.
Like all theories, the rational choice theory is not perfect. If you want to advance this theory, how would you start? In my book on how to develop theoretical framework, one step is to challenge assumptions of a theory. What are key assumptions of the rational choice theory? Which key assumptions of the rational choice theory are problematic?
The first key assumption is that a rational decision maker is purely self-interested. Is it true in the real world? If it’s true, then how to explain a stranger running into fire to save a dog trapped in a house fire? Humans can be selfish and selfless, depending on the context. In my article on the role of emotions in leaders’ decision making, I introduced the argument that evoking different emotions can influence decision outcomes. For example, evoking Self-transcendent emotions, such as awe, gratitude, and compassion, we nudge decision-makers to focus less on themselves and focus more on others.
The second key assumption of the rational choice theory is that the goal of a decision maker is to maximize utility. In a Trolley problem, a trolley is headed for five people, who will be killed if it proceeds on its present course. The only way to save them is for you to pull a switch that will turn the trolley onto a different track, where it will kill one person instead of five. Would you pull the switch and turn the trolley in order to save five people at the expense of one? If you apply the rational choice theory, you will choose to pull the switch to save five people because saving five people is the maximized outcome. The means justify the ends. It is permissible to cause harm to one person as a byproduct of achieving greater good which is the five people saved. Leaders can take solace in knowing that they’re doing the right thing—at least for the group. But a purely rational utilitarian calculus can quickly lead to the tyranny of the majority. Using the principle of utility maximization, we can use the majority benefits to justify the tyranny of the majority, such as involuntary experimentation for the betterment of human beings, and changing test scores so that schools won’t be closed due to chronically low-performing school outcomes.
The third key assumption of the rational choice theory is stable and transitive preferences. For choices to be rational, all choice alternatives must be comparable and have transitive preference relations, so they can be ordered or ranked by the decision-maker. What does transitive preference mean? It means if you prefer choice option x to y and y to z, then you must prefer x to z. If you prefer Candidate A to B to C, you must prefer A to C. This can get problematic when you put in order or rank people’s principles of justice and value of life. I talked about three principles of distributive justice in an earlier video on organizational justice. People’s preferred principles of equality, equity, and need vary widely, depending on the issues under discussion. That evidence, and many others, challenge the assumption of stable and transitive preferences. It is particularly problematic and impractical for decision makers when their organizational members have diverse religious and cultural values that may clash with one another.
The fourth key assumption of the rational choice theory is that a rational decision maker is assumed to be someone who is “all-knowing”, with unrestricted cognitive capacity. A rational decision maker is always able to calculate and select the optimal option. In organizations, to make rational decisions, we’ll have to assume that decision-makers have perfect knowledge, and the relevant knowledge is available and accessible where and when the decision is made. To decide how to use the budget of $100,000 in a department, a rational decision maker is assumed to know all options, such as hiring a new staff member, updating conference room furniture, and inviting a speaker for a professional development session. And the outcomes of all of those options can be somehow measured, compared, and ranked in a descending order. To include student test scores as part of school principals’ evaluation, we assume that there is a relationship between school leadership and student test scores. And we assume that relationship is not just association, but causation. But empirical evidence suggests a very weak association between school leadership and school performance. Let me say it again: the evidence of a weak association, not causation. Most of school leadership studies did not conduct randomized control experiments which are considered as the highest level of evidence to establish a causal relationship. If there is only evidence suggesting a weak association, not causation, between leadership and school performance, can you use the rational choice theory to explain using school performance to evaluate school district superintendents? Here is another question: how do you use the rational choice theory to explain a recent policy proposal to use school performance outcomes to evaluate the quality of school leadership preparation programs?
Here are the key assumptions of the rational choice theory and their challenges. It is mere conjecture to say that optimal decisions can only be made through rational, deliberative processes. We have placed a high premium on rationality that we tend to see all decisions are made through a purely cognitively rational lens. Let’s not delude ourselves that we are consistent as we make decisions. I wrote a book on 52 biases in leaders’ decision making, in which I explained how leaders’ decisions can go awry when taking mental shortcuts.
Here is an example of applying the rational choice theory in empirical research. The title of the article is “Where Power Resides in Committees.” The article was published in The Leadership Quarterly in 2021. In this article, authors investigated the effects of power in the context of small committees that reach decisions through voting. This is a very common decision-making approach in organizations. The power to control decisions is rarely distributed equally among committee members. The authors differentiated two constructs: formal power and real power. Formal power of a committee member is an explicit decision right. For example, you have a tie-breaking power in a committee. That tie-breaking power is the formal power. It creates an asymmetry of control over the final decision. Your tie-breaking power indicates that you have power over other committee members. And that formal power is expected to have an influence on other committee members’ perceptions of how you will use that tie-breaking power and ultimately how other committee members vote in the committee.
Real power of a committee member captures the effective control over committee decisions and can be assessed by the degree to which the collective decision is aligned with a committee member’s preferences over the set of all possible outcomes. The difference between holding the formal decision right and real influence over outcomes can be understood in this way. You delegate your decision right to a subordinate. But you always hold the right and discretion to determine the final outcome in the committee. That discretion is your formal power. Whether you wield your formal tie-breaking power to your advantage or not depends on the behavior of all committee members. It means that you can wield your formal tie-breaking power only when voting in the committee has reached a tie. In this case, your formal tie-breaking power is a “source of potential influence.” That is your real power.
Here is a scenario. In a 3-member voting committee, there are chair, member 2 and 3. The committee decides to implement one of three available alternatives: A, B, or C. Members' preferences over alternatives are publicly known and represent a situation of conflict. Chair favors A ≻ B ≻ C; member 2 favors C ≻ A ≻ B; member 3 favors B ≻ C ≻ A. Members vote simultaneously and independently for one of the alternatives. The final decision outcome is determined by the majority rule. In case of a tie among alternatives, the tie is broken by the chair. How to use the rational choice theory to develop hypotheses in decision-making in committees?
In the article, the authors predicted that the chair's preferred alternative A will be implemented in the committee with zero probability. This outcome implies that the chair holds no real power in the committee, i.e., no effective control over outcomes. How did the authors develop the hypothesis? According to the rational choice theory, self-interested committee members seek to maximize their preferences over alternatives. They are offered strong incentives to coordinate against the chair who is the power holder with a preference that is different from the committee members. The chair, on the other hand, has no means with which to punish members and no reward mechanism with which to encourage their cooperation, because the chair can only exercise formal tie-breaking power to his or her advantage when there is a tie.
Is this hypothesis supported by the data? The authors conducted experiments. Results from two controlled experiments show that the committee chair's real power is substantially higher than predicted by the rational choice theory. The committee chair's real power is primarily associated with one committee member siding with the committee chair who is a formal power holder. The authors also provided causal evidence that holding tie-breaking power legitimately increases the real power of the chair in the committee in the short run. What is legitimate power? In my earlier video on power and sources of power, legitimate power is granted to you usually through your hierarchical position in an organization. A committee chair’s legitimate power can psychologically sway one committee member, against his or her incentives, into choosing the chair's preferred alternative more often than if tie-breaking power is allocated randomly.
In this video, I introduced the rational choice theory. It is the theoretical root of many currently popular decision-making approaches, such as data-driven decision making, data-informed decision making, evidence-based decision making, and cost-benefit analysis. I introduced the six elements of the rational choice theory, the four key assumptions, and how those assumptions have been challenged. I also used an example to explain how the rational choice theory was used to develop hypotheses in research to study the tie-breaking power in a committee. If you want to know about how to build a theoretical framework for your research, I’ve published a book titled Demystify Theories: A Workbook for Developing Theoretical Frameworks of Educational Leadership Research. The link of the book is in the description below.