Back to:ECONOMIC ANALYSIS & MONETARY POLICY

Rational Self-interest Definition

Rational Self-Interest is a behavioral assumption that economists make about how people act under different economic conditions. Acting in an economically rational way entails taking actions that reduce costs and increase benefits for the individual. Acting conversely renders actions economically irrational.

A Little More on What is Rational Self Interest

People making active choices to serve their own Self-Interest is the assumption that economists make to predict economic behavior. Individuals choosing actions that prove optimally beneficial to them while avoiding situations that would further harm their economic condition, or not provide the best value for their time, money, or efforts, is the sum total of Rational Self-Interest. For example, John needs to stretch the last $20 he has for the last week of the month. He needs to be able to feed himself while also commuting to work by bus everyday. Economists predict that Rational Self-Interest is the reason why John buys ramen in bulk to last a week for $10, and spends the rest buying a bus pass to commute for the next 7 days. Thus he maximises the $20 he had to ensure all his needs are covered within his limited resources, arriving at an optimal outcome. Conversely, spending his last $20 for a coffee and donut at Starbucks would make for a very bad decision. Rational Self-Interest doesnt imply selfish behavior. The word Rational qualifies the Self-Interest as beneficial rather than greedy. Self-Interest can also entail making others happy. Saving income to buy gifts, or spending on family, is also an act of Rational Self-Interest that encompasses making others happy. Its a simplified view of rationality that economists rely on to explain the process of human decision making. Rationality in Commerce This theory of rational behavior is applied in the field of commerce to understand consumer behavior and answer the question, What do consumers want?. The simple answer being maximum benefits at minimal costs. For e.g., what would bring the consumer to the movie theatre in the era of Netflix? What would induce a customer to spend more money to watch a single movie instead of spending a small amount to have access to thousands of movies? The answers to these questions will shape customer strategies adopted by movie studios to fill in movie hall seats. The benefits of rational decisions arent limited to minimising costs, they also include a satisfaction component that makes consumers spend more for experiences that make them happy even if the expenditure isnt optimal. Rationality in Business Unlike consumers, businesses do not have a satisfaction or happiness angle. Hence their Rational Self-Interest is guided by behavior that maximises profits and minimises operational costs. Thus, economists will base their predictions about businesses on the basis of their profit margin goals. If the minimum wage was to be increased in the U.S., companies might strive to reduce operational costs by outsourcing menial jobs to countries with lower wage requirements. This is just a prediction based on the Rational Self-Interest theory and might not always be 100% accurate, although the underlying assumption that companies will make a move towards reducing operational costs in salaries stands true. Both businesses and consumers are making rational choices that will serve their self-interests, whichever way they lie.

References for Rational Self-Interest

• https://courses.lumenlearning.com/wm-macroeconomics/chapter/reading-rationality-and-self-interest/
• https://www.investopedia.com/terms/s/self-interest.asp
• https://study.com/academy/lesson/the-role-of-rational-self-interest-in-economic-analysis.html
• https://hbr.org/2008/11/voting-for-behavioral-economic

Academic Research on Rational Self-Interest

Considering rational self-interest as a disposition: organizational implications of other orientation., Meglino, B. M., & Korsgaard, A. (2004). Journal of Applied Psychology, 89(6), 946. This journal takes a deeper look at the theory of Rational Self-Interest and focuses on the different levels of motivation people have to pursue their self-interests. Morality and rational self-interest, Gauthier, D. P. (1970). This books talks about other behavioral traits that have a bearing on Rational Self-Interest like reason, ego, and more. Rational self-interest and other orientation in organizational behavior: a critical appraisal and extension of Meglino and Korsgaard (2004)., De Dreu, C. K. (2006). The authors argue that Rational Self-Interest is correlated to other orientations and behavioral traits that impact the kind of decisions an individual makes. An empirical study of otheroriented and rational selfinterest leadership approaches, Barrow, L. M., & Mirabella, J. (2009). Journal of Leadership Studies, 3(2), 44-54. This journal takes a look at Rational Self-Interest and other oriented behavior in light of Leadership and how they affect leadership styles. Editorial proximity equals publication success: A function of rational self-interest or good-faith economy?, Everett, J. (2008). Critical perspectives on accounting, 19(8), 1149-1176. This journal takes a critical look at Rational Self-Interest in the publishing industry, discussing the assumption that nearness to editors at the top increases the possibility of getting published. Social construction of rational self-interest: the case of Business Improvement Districts, Justice, J. B. (2006). This article takes a look at the functioning of Rational Self-Interest in a collective-action setting. Utility and rational self-interest, McDermott, M. (1984). Philosophical Studies, 46(2), 199-214. This chapter discusses Utilitarianism on the basis of Rational Self-Interest. Rational Self-Interest and the Social Adjustment, Wright, H. W. (1920). The International Journal of Ethics, 30(4), 394-403. This paper discusses theories of Social Adjustment through the lens of Rational Self-Interest. Ann Rand's" Rational Self-interest" Moral Values and It's Meaning to Moral Education, Quan, Z. H. O. U. (2012). Journal of Schooling Studies, 2, 019. This article discusses the moral aspects of Rational Self-Interest. Rational Self-Interest, Cost-Benefit Analysis, and Unionization Campaign Support, Devinatz, V. G. (2008). Journal of Collective Negotiations (formerly Journal of Collective Negotiations in the Public Sector), 32(2), 89-95. This article presents a case study to highlight Non-Rational Self-Interest factors at play in a unionized college election campaign. Rethinking the Meaning of Self-Interest, Rational Choice, Growth and Happiness: How the Misunderstanding of These Concepts Caused Misery for Millions, Friedman, H. H., & Gerstein, M. (2016). This paper presents the theory of Rational Self-Interest in a new light, explaining it in conjunction with three other oft-cited, behavioral economics terms - Rational Choice, Growth, and Happiness, highlighting the significance of the interplay between these choices.