Rational choice model

A framework that models agents as choosing among available options to maximize their preferences or expected utility, subject to constraints.

Preference relation: A relation that represents how an agent ranks possible outcomes. It formalizes the rankings the model seeks to maximize.
Constrained optimization: The search for the best value of an objective while satisfying specified restrictions. It expresses choice as maximizing an objective within the feasible options.
Consumer theory: The study of how consumers allocate limited resources among goods and services. It models purchases as choices that maximize satisfaction under a budget.
Bounded rationality: A theory that models decision-makers as limited by information, cognitive capacity, or time. It replaces full optimization with decisions shaped by practical limits.
Utility function: A function that assigns numerical values to outcomes while representing an agent’s preferences. It converts preference rankings into quantities that can be maximized.
Revealed preference: An approach that infers preferences from observed choices among available alternatives. Observed selections can test whether choices fit a stable preference ordering.
Game theory: The mathematical study of strategic interaction among agents whose outcomes depend on one another’s choices. It applies choice reasoning to settings where others’ actions affect payoffs.
Prospect theory: A theory of decisions under risk in which outcomes are evaluated relative to a reference point. It predicts systematic departures from expected-utility choice under risk.
Choice set: The set of options available to an agent in a particular decision. The model selects only among options included in this set.
Utility maximization problem: An optimization problem that selects the feasible option with the greatest utility. It is the model’s central mathematical formulation.

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