Mediaspace scheduled maintenance: Aug 25, 2026 07:00 - 12:00 AM. During this time, videos will be temporarily unavailable. Check status updates.

Lecture

Choice Theory: Theoretical Foundations

Description

This lecture introduces the theoretical foundations of choice theory, focusing on the ingredients that constitute choice models. It covers the theory of behavior, building the theory by defining decision makers, their characteristics, available alternatives, attributes of alternatives, and decision rules. The lecture also discusses individual characteristics, continuous and discrete choice sets, alternative attributes, decision rules like Homo economicus, utility, and behavioral assumptions.

Official source

Related concepts (27)

Decision theory

Decision theory (or the theory of choice; not to be confused with choice theory) is a branch of applied probability theory and analytic philosophy concerned with the theory of making decisions based on assigning probabilities to various factors and assigning numerical consequences to the outcome. There are three branches of decision theory: Normative decision theory: Concerned with the identification of optimal decisions, where optimality is often determined by considering an ideal decision-maker who is able to calculate with perfect accuracy and is in some sense fully rational.

Decision-making

In psychology, decision-making (also spelled decision making and decisionmaking) is regarded as the cognitive process resulting in the selection of a belief or a course of action among several possible alternative options. It could be either rational or irrational. The decision-making process is a reasoning process based on assumptions of values, preferences and beliefs of the decision-maker. Every decision-making process produces a final choice, which may or may not prompt action.

Rational choice theory

Rational choice theory refers to a set of guidelines that help understand economic and social behaviour. The theory originated in the eighteenth century and can be traced back to political economist and philosopher, Adam Smith. The theory postulates that an individual will perform a cost-benefit analysis to determine whether an option is right for them. It also suggests that an individual's self-driven rational actions will help better the overall economy. Rational choice theory looks at three concepts: rational actors, self interest and the invisible hand.

Behavioral economics

Behavioral economics studies the effects of psychological, cognitive, emotional, cultural and social factors in the decisions of individuals or institutions, and how these decisions deviate from those implied by classical economic theory. Behavioral economics is primarily concerned with the bounds of rationality of economic agents. Behavioral models typically integrate insights from psychology, neuroscience and microeconomic theory. The study of behavioral economics includes how market decisions are made and the mechanisms that drive public opinion.

Utility

As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosophers such as Jeremy Bentham and John Stuart Mill. The term has been adapted and reapplied within neoclassical economics, which dominates modern economic theory, as a utility function that represents a consumer's ordinal preferences over a choice set, but is not necessarily comparable across consumers or possessing a cardinal interpretation.

Related lectures (33)

Ingredients of choice theory MOOC: Introduction to Discrete Choice Models

Covers the theoretical foundations of choice theory and its key components for decision making.

Beyond Rationality: Behavioral Economics MOOC: Selected Topics on Discrete Choice

Delves into human decision-making beyond rationality, exploring concepts like the decoy effect.

Choice Models: Predicting Consumer Behavior

Explores choice models to predict consumer behavior and market shares.