Skip to content
Skip to main content
header search
ahihi OpenLearn
OpenLearn
Menu
sticky search
  • Video
  • 5 minutes

60 second adventures in economics: Rational Choice Theory

Updated Friday, 30 September 2022

People are pretty rational. But not quite rational enough for the good of the economy.

Find out more about The Open University's Economics courses.



Transcript: Of all the things to factor in when running an economy, the most troublesome is people. Now by and large – humans are a rational lot. When the price of something rises people will supply more of it – and buy less of it.

If they expect inflation to go up – people will usually ask for higher wages – (though they might not get them) And if they can see interest or exchange rates falling in one country, people with lots of money there will try to move it out, faster than you can say ‘double dip’. And governments often decide their economic policies assuming such rational actions.

Which would be great, if it weren’t for the fact that those pesky humans don’t always do what’s best for them. Sometimes they mistakenly think they know all the facts, or maybe the facts are just too complicated And sometimes people just decide to follow the crowd, relying on others to know what they’re doing.

When too many cheap mortgages were being sold in 2007 – a lot of people didn’t know what was going on. And a lot of others just followed the crowd. Some lenders may have rationally believed that, when the crunch came, the scale of the problem would force governments to rescue them. Which was true for the banks. If not for all their customers.

Got another 60 seconds?

Got more than 60 seconds? Try these FREE courses...

  • Economics and the 2008 crisis: a Keynesian view

    Economics and the 2008 crisis: a Keynesian view

    This free course, Economics and the 2008 crisis: a Keynesian view, looks at how Keynes's theories revolutionised thinking about the causes of crises and unemployment. Keynes's thinking on how to reduce these problems was very influential with economists and policy makers for several decades following the 1930s. The economic downturn that started...

    Learn more to access more details of Economics and the 2008 crisis: a Keynesian view

    Free course

    28 hours

    Level: 2 Intermediate

  • Economics explains discrimination in the labour market

    Economics explains discrimination in the labour market

    Discrimination in the labour market exists in many forms: the 'glass ceiling', ageism, racism, and so on. This free course, Economics explains discrimination in the labour market, will help you look at this problem from a new perspective: through economics. You will learn how economists have tried to understand what drives this distortion of the...

    Learn more to access more details of Economics explains discrimination in the labour market

    Free course

    8 hours

    Level: 3 Advanced

  • Rent or buy? The challenge of access to housing

    Rent or buy? The challenge of access to housing

    Everyone needs a place they call home and housing costs are usually your largest outgoing. Many aspire to buy, but rising house prices, while good news for existing owners, put homeownership beyond the reach of others. This free course, Rent or buy? The challenge of access to housing, addresses some of the most important decisions that ...

    Learn more to access more details of Rent or buy? The challenge of access to housing

    Free course

    8 hours

    Level: 1 Introductory

 

 

Become an OU student

Ratings & Comments

Share this free course

Copyright information

Skip Rate and Review

For further information, take a look at our frequently asked questions which may give you the support you need.

Have a question?

Share this video