Question

The theory of rational behavior

Answer 1

The theory of rational behavior is the part of decision making process of a person or company that offers highest possible returns in monetary or non monetary terms. The assumption of rational behavior is that an individual or group always derive maximum benefits or utility from the decision making process. The conventional economic theory of rational behavior states that people are more inclined towards activities or decisions that offers them maximum possible benefits. Though rational behaviors of companies always indicates benefits such as net revenues, total sales etc, it does not mean that companies through rational behavior always strive for maximum profits. The profits of a company depends on numerous factors such as consumers' demand, tastes, income, substitutes, government policy etc.

Similarly individual rational behavior does not mean that an individual is always seeking monetary benefits through rational decision making process. An individual may take rational decision to invest in equity shares that involves more risks than safer options such as government securities and mutual funds. The future benefits or high satisfaction may also be the objective of rational behaviors of individuals. Emotions also play crucial role in individual rational behavior as many individuals prefer to invest in equity stocks of a company due to emotional affiliation with that company. To sum up, emotional behavior depends on both short term and long term goals of individuals and companies and it can be for monetary or non-monetary benefits or both.