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An approach to social and economic decision-making known as "rational choice theory" makes the assumption that people make decisions that are in their best interests based on the knowledge at hand and their preferences.
It assumes that people conduct cost-benefit analyses when making decisions and that they select the course of action that maximizes their utility, which is a metric for the satisfaction or enjoyment they gain from their decisions.
Assuming that investors make rational choices based on the expected return and risk associated with various investment possibilities, the rational choice theory is frequently used in finance to describe how investors make investment decisions. The theory assumes that when making investment decisions, investors assess the prospective benefits against the potential dangers and select the option that offers the highest projected return for the level of risk they are willing to take.
Although the rational choice theory is a popular framework for examining decision-making in economics and finance, it has also come under fire, with some contending that it fails to adequately account for the role of emotions, social norms, and other factors that may influence decision-making in addition to pure rationality.
