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105-452: In insolvency , the term is used to determine which outstanding obligation the insolvent party has to settle first. In psychology , preferences refer to an individual's attitude towards a set of objects, typically reflected in an explicit decision-making process. The term is also used to mean evaluative judgment in the sense of liking or disliking an object, as in Scherer (2005), which is

210-490: A court of law with resulting legal orders intended to resolve the insolvency. Accounting insolvency happens when total liabilities exceed total assets (negative net worth ). The principal focus of modern insolvency legislation and business debt restructuring practices no longer rests on the liquidation and elimination of insolvent entities but on the remodeling of the financial and organizational structure of debtors experiencing financial distress so as to permit

315-500: A balance-sheet insolvency) become personally liable for the business's debts. Trading insolvently is often regarded as normal business practice in South Africa, as long as the business is able to fulfill its debt obligations when they fall due. Under Swiss law, insolvency or foreclosure may lead to the seizure and auctioning off of assets (generally in the case of private individuals) or to bankruptcy proceedings (generally in

420-772: A certain idea or concept correlates with a positive preference. In economics and other social sciences , preference refers to the set of assumptions related to ordering some alternatives, based on the degree of happiness , satisfaction, gratification , morality, enjoyment, or utility they provide. The concept of preferences is used in post- World War II neoclassical economics to provide observable evidence in relation to people's actions. These actions can be described by Rational Choice Theory , where individuals make decisions based on rational preferences which are aligned with their self-interests in order to achieve an optimal outcome. Consumer preference, or consumers' preference for particular brands over identical products and services,

525-408: A company deeper into bankruptcy, under the legal theory of "deepening insolvency". In determining whether a gift or a payment to a creditor is an unlawful preference, the date of the insolvency, rather than the date of the legally declared bankruptcy, will usually be the primary consideration. Rational Choice Theory The rational choice model , also called rational choice theory refers to

630-434: A concept with significant temporal stability, but revealed preference measures do not. Preferences and desires are two closely related notions: they are both conative states that determine our behavior. The difference between the two is that desires are directed at one object while preferences concern a comparison between two alternatives, of which one is preferred to the other. The focus on preferences instead of desires

735-601: A court-appointed insolvency administrator, 'debtor-in-possession' proceedings are common since the legislative changes in 2012. For natural persons, the Verbraucherinsolvenzverfahren (literally "insolvency proceeding for individual consumers") allows discharge of all debts after three years, if certain conditions are met. In Hong Kong , insolvency is primarily governed by the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) and

840-489: A decision which is good enough, rather than the best decision. Other economists have developed more theories of human decision-making that allow for the roles of uncertainty , institutions , and determination of individual tastes by their socioeconomic environment (cf. Fernandez-Huerga, 2008). Martin Hollis and Edward J. Nell 's 1975 book offers both a philosophical critique of neo-classical economics and an innovation in

945-414: A deductive power to ‘rational’ that it cannot have consistently with positivist (or even pragmatist ) assumptions (which require deductions to be simply analytic). To make rational calculations projectible, the agents may be assumed to have idealized abilities, especially foresight; but then the induction problem is out of reach because the agents of the world do not resemble those of the model. The agents of

1050-477: A desire to make the creditor better off, for them to be a preference. If the preference is proven, legal action can occur. It is a wrongful act of trading. Disqualification is a risk. Preference arises within the context of the principle maintaining that one of the main objectives in the winding up of an insolvent company is to ensure the equal treatment of creditors. The rules on preferences allow paying up their creditors as insolvency looms, but that it must prove that

1155-402: A liquidator of their own choice. This process is known as creditors voluntary liquidation (CVL), as opposed to members voluntary liquidation (MVL) which is for solvent companies. Alternatively, a creditor can petition the court for a winding-up order which, if granted, will place the company into what is called compulsory liquidation or winding up by the court. The liquidator realises the assets of

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1260-436: A penalty. Balance-sheet insolvency is when a person or company does not have enough assets to pay all of their debts. The person or company might enter bankruptcy , but not necessarily. Once a loss is accepted by all parties, negotiation is often able to resolve the situation without bankruptcy. A company that is balance-sheet insolvent may still have enough cash to pay its next bill on time. However, most laws will not let

1365-407: A pre-arranged sale of the company's business, often to its directors or owners. The process can be seen as controversial because the creditors do not have the opportunity to vote against the sale. The rationale behind the device is that the swift sale of the business may be necessary or of benefit to enable a best price to be achieved. If the sale was delayed, creditors would ultimately lose out because

1470-448: A preferable alternative to bankruptcy. Debt restructuring is a process that allows a private or public company - or a sovereign entity - facing cash flow problems and financial distress, to reduce and renegotiate its delinquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its operations. Although the term "bankrupt" may be used referring to a government, sovereign states do not go bankrupt. This

1575-476: A problem of maximizing this utility function , subject to constraints (e.g. a budget). This has many advantages. It provides a compact theory that makes empirical predictions with a relatively sparse model - just a description of the agent's objectives and constraints. Furthermore, optimization theory is a well-developed field of mathematics. These two factors make rational choice models tractable compared to other approaches to choice. Most importantly, this approach

1680-400: A process that doesn't always align with the group's preferences. Voter behaviour shifts significantly thanks to rational theory, which is ingrained in human nature, the most significant of which occurs when there are times of economic trouble. An example in economic policy, economist Anthony Downs concluded that a high income voter ‘votes for whatever party he believes would provide him with

1785-459: A proclivity to engage in behaviours or activities that entail greater variance returns, regardless of whether they be gains or losses, and are frequently associated with monetary rewards involving lotteries. There are two different traditions of measuring preference for risk, the revealed and stated preference traditions, which coexist in psychology, and to some extent in economics as well. Risk preference evaluated from stated preferences emerges as

1890-531: A progressive concrete research program, can all be traced to this starting-point. More recently Edward J. Nell and Karim Errouaki (2011, Ch. 1) argued that: The DNA of neoclassical economics is defective. Neither the induction problem nor the problems of methodological individualism can be solved within the framework of neoclassical assumptions. The neoclassical approach is to call on rational economic man to solve both. Economic relationships that reflect rational choice should be ‘projectible’. But that attributes

1995-488: A relationship must exist between two options, such that x must be preferred to y or y must be preferred to x, or is indifferent between them. For example, if I prefer sugar to honey and honey to sweetener then I must prefer sugar to sweetener to satisfy transitivity and I must have a preference between the items to satisfy completeness. Under the axiom of completeness, an individual cannot lack a preference between any two options. If preferences are both transitive and complete,

2100-459: A set of axioms , then he is maximizing the expected value of a utility function. In utility theory, preference relates to decision makers' attitudes towards rewards and hazards. The specific varieties are classified into three categories: 1) risk-averse, that is, equal gains and losses, with investors participating when the loss probability is less than 50%; 2) the risk-taking kind, which is the polar opposite of type 1); 3) Relatively risk-neutral, in

2205-410: A set of choice axioms that need to be satisfied, and typically does not specify where the goal (preferences, desires) comes from. It mandates just a consistent ranking of the alternatives. Individuals choose the best action according to their personal preferences and the constraints facing them. Rational choice theory can be viewed in different contexts. At an individual level, the theory suggests that

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2310-415: A set of guidelines that help understand economic and social behaviour. The theory originated in the eighteenth century and can be traced back to the 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. Rational choice theory looks at three concepts: rational actors, self interest and

2415-432: A set of objects, for example a set of j exhaustive and exclusive actions: For example, if a person can choose to vote for either Roger or Sara or to abstain, their set of possible alternatives is: The theory makes two technical assumptions about individuals' preferences over alternatives: Together these two assumptions imply that given a set of exhaustive and exclusive actions to choose from, an individual can rank

2520-410: A starting point for making social decisions. Despite differing view points about Rational choice theory, it all comes down to the individual as a basic unit of theory. Even though sharing, cooperation and cultural norms emerge, it all stems from an individual's initial concern about the self. G.S Becker offers an example of how Rational choice can be applied to personal decisions, specifically regarding

2625-415: A strong (but perhaps not absolute) connotation that the debtor is balance-sheet solvent, whereas the term "actually insolvent" does not. Cash-flow insolvency involves a lack of liquidity to pay debts as they fall due. Balance sheet insolvency involves having negative net assets —where liabilities exceed assets. Insolvency is not a synonym for bankruptcy , which is a determination of insolvency made by

2730-522: A successful rescue of a company's business via a sale, but not of the company itself. Since the introduction of the collective insolvency procedure of Administration in 1986, the legislators have decided to set a shelf life on the administrative receivership or, in Scotland, receivership procedure and it is no longer possible to appoint an administrative receiver or, in Scotland, receiver under security created after 15 September 2003. In individual cases

2835-512: A variety of criterion to perform their self-determined best choice of action. One version of rationality is instrumental rationality , which involves achieving a goal using the most cost effective method without reflecting on the worthiness of that goal. Duncan Snidal emphasises that the goals are not restricted to self-regarding, selfish, or material interests. They also include other-regarding, altruistic, as well as normative or ideational goals. Rational choice theory does not claim to describe

2940-401: A whole system for their classification. However, the authors believe that the issues arising from basic maximizing models have extensive implications for econometric methodology (Hollis and Nell, 1975, p. 2). In particular it is this class of models – rational behavior as maximizing behaviour – which provide support for specification and identification. And this, they argue, is where the flaw

3045-418: Is a synonym for balance sheet insolvency, which means that its liabilities are greater than its assets , and actual insolvency is a synonym for the first definition of insolvency ("Insolvency is the inability of a debtor to pay their debt."). While technical insolvency is a synonym for balance-sheet insolvency, cash-flow insolvency and actual insolvency are not synonyms. The term "cash-flow insolvent" carries

3150-546: Is a difference of underlying assumptions in both contexts. In a social setting, the focus is often on the current or past reinforcements, with no guarantee of immediate tangible or intangible returns from another individual in the future. In Economics, decisions are made with heavier emphasis on future rewards. Despite having both perspectives differ in focus, they primarily reflect on how individuals make different rational decisions when given an immediate or long-term circumstances to consider in their rational decision making. Both

3255-456: Is an amount certainly disproportionately weak relative to its appearance in the literature. Yet, they concede that cutting-edge research, by scholars well-versed in the general scholarship of their fields (such as work on the U.S. Congress by Keith Krehbiel , Gary Cox , and Mat McCubbins ) has generated valuable scientific progress. Schram and Caterino (2006) contains a fundamental methodological criticism of rational choice theory for promoting

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3360-484: Is an important notion in the psychological influence of consumption. Consumer preferences have three properties: completeness, transitivity and non-satiation. For a preference to be rational, it must satisfy the axioms of transitivity and Completeness (statistics) . The first axiom of transitivity refers to consistency between preferences, such that if x is preferred to y and y is preferred to z, then x has to be preferred to z. The second axiom of completeness describes that

3465-486: Is called Prospect Theory . The 'doubly-divergent' critique of Rational Choice Theory implicit in Prospect Theory has sometimes been presented as a revision or alternative. Daniel Kahneman's work has been notably elaborated by research undertaken and supervised by Jonathan Haidt and other scholars. In their 1994 work, Pathologies of Rational Choice Theory , Donald P. Green and Ian Shapiro argue that

3570-477: Is defined both in terms of cash flow and in terms of balance sheet in the UK Insolvency Act 1986 , Section 123, which reads in part: 123.-(1) A company is deemed unable to pay its debts --- (a) if a creditor (by assignment or otherwise) to whom the company is indebted in a sum exceeding £750 then due has served on the company, by leaving it at the company's registered office, a written demand (in

3675-420: Is insolvent may be put into liquidation (sometimes referred to as winding-up). The directors and shareholders can instigate the liquidation process without court involvement by a shareholder resolution and the appointment of a licensed Insolvency Practitioner as liquidator. However, the liquidation will not be effective legally without the convening of a meeting of creditors who have the opportunity to appoint

3780-442: Is misused. Demands are made of it that it cannot fulfill. Ultimately, individuals do not always act rationally or conduct themselves in a utility maximising manner. Duncan K. Foley (2003, p. 1) has also provided an important criticism of the concept of rationality and its role in economics. He argued that “Rationality” has played a central role in shaping and establishing the hegemony of contemporary mainstream economics. As

3885-699: Is primarily codified in the Insolvency Act, 2003 and the Insolvency Rules, 2005. In Canada , bankruptcy and insolvency are generally regulated by the Bankruptcy and Insolvency Act . An alternative regime is available to larger companies (or affiliated groups) under the Companies' Creditors Arrangements Act , where total debts exceed $ 5 million. In Germany , insolvency proceedings, both for companies and for natural persons, are regulated by

3990-411: Is so because bankruptcy is governed by national law; there exists no entity to take over such a government and distribute assets to creditors. Governments can be insolvent in terms of not having money to pay obligations when they are due. If a government does not meet an obligation, it is in " default ". As governments are sovereign entities, creditors who hold debt of the government cannot easily seize

4095-482: Is strikingly general. It has been used to analyze not only personal and household choices about traditional economic matters like consumption and savings, but also choices about education, marriage, child-bearing, migration, crime and so on, as well as business decisions about output, investment, hiring, entry, exit, etc. with varying degrees of success. In the field of political science rational choice theory has been used to help predict human decision making and model for

4200-414: Is stronger than her desire for coffee. One argument for this approach is due to considerations of parsimony: a great number of preferences can be derived from a very small number of desires. One objection to this theory is that our introspective access is much more immediate in cases of preferences than in cases of desires. So it is usually much easier for us to know which of two options we prefer than to know

4305-447: Is the benefit of the voter winning, D is the satisfaction derived from voting and C is the cost of voting. It is from this that we can determine that parties have moved their policy outlook to be more centric in order to maximise the number of voters they have for support. It is from this very simple framework that more complex adjustments can be made to describe the success of politicians as an outcome of their ability or failure to satisfy

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4410-452: Is to be found. Hollis and Nell (1975) argued that positivism (broadly conceived) has provided neo-classicism with important support, which they then show to be unfounded. They base their critique of neo-classicism not only on their critique of positivism but also on the alternative they propose, rationalism . Indeed, they argue that rationality is central to neo-classical economics – as rational choice – and that this conception of rationality

4515-420: Is very common in the field of decision theory . It has been argued that desire is the more fundamental notion and that preferences are to be defined in terms of desires. For this to work, desire has to be understood as involving a degree or intensity. Given this assumption, a preference can be defined as a comparison of two desires. That Nadia prefers tea over coffee, for example, just means that her desire for tea

4620-409: Is when a person or company has enough assets to pay what is owed, but does not have the appropriate form of payment. For example, a person may own a large house and a valuable car, but not have enough liquid assets to pay a debt when it falls due. Cash-flow insolvency can usually be resolved by negotiation . For example, the bill collector may wait until the car is sold and the debtor agrees to pay

4725-416: Is where "individuals place trust, in both judgement and performance of others, based on rational considerations of what is best, given the alternatives they confront". In a social situation, there has to be a level of trust among the individuals. He noted that this level of trust is a consideration that an individual takes into concern before deciding on a rational action towards another individual. It affects

4830-632: The Dutch book theorems show that this comes at a major cost of internal coherence, such that weakening any of the Von Neumann–Morgenstern axioms makes. The most severe consequences are associated with violating independence of irrelevant alternatives , and transitive preferences , or fully abandoning completeness rather than weakening it to "asymptotic" completeness. Alternative theories of human action include such components as Amos Tversky and Daniel Kahneman 's prospect theory , which reflects

4935-465: The Insolvency Act 1986 which aim to provide time for the rescue of a company or, at least, its business. These are Administration and Company Voluntary Arrangement : One particular type of Administration that is becoming more common is called pre pack administration (more information under administration (law) ). In this process, immediately after appointment the administrator completes

5040-680: The ordinary course of business , or cannot pay its debts as they become due, or is insolvent within the meaning of the Bankruptcy Code . This is important because certain rights under the code may be invoked against an insolvent party which are otherwise unavailable. The United States has established insolvency regimes which aim to protect the insolvent individual or company from the creditors, and balance their respective interests. For example, see Chapter 11, Title 11, United States Code . However, some state courts have begun to find individual corporate officers and directors liable for driving

5145-706: The Bankruptcy Act (Cap B.15) or the Companies Act (Cap C.65). In Australia , corporate insolvency is governed by the Corporations Act 2001 (Cth). Companies can be put into Voluntary Administration , Creditors Voluntary Liquidation, and Court Liquidation. Secured creditors with registered charges are able to appoint Receivers and Receivers & Managers depending on their charge. In the British Virgin Islands , insolvency law

5250-770: The Companies (Winding Up) Rules (Cap 32H). In India , bankruptcy and insolvency are generally regulated by the Insolvency and Bankruptcy Code 2016. The Insolvency and Bankruptcy Board of India (IBBI) is the regulator for overseeing insolvency proceedings and entities like Insolvency Professional Agencies (IPA), Insolvency Professionals (IP) and Information Utilities (IU) in India . Insolvent citizens may not contest/be appointed for any public office, nor may they participate in govt exams. They are also not allowed to emigrate out. Iranian government Tax, finance and bankruptcy administration handles corporations . First insolvency law

5355-421: The Insolvency Act (Insolvenzordnung), in effect since 1999 but with significant changes in 2012. The goal of insolvency law is the equal and best satisfaction of creditors. If the interests of creditors are respected, insolvent companies are offered different ways to restructure their businesses, for example by implementing an 'insolvency plan' ( Insolvenzplan ) . While regular insolvency proceedings are led by

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5460-513: The agent will decide on the action (or outcome) they most prefer. If the actions (or outcomes) are evaluated in terms of costs and benefits, the choice with the maximum net benefit will be chosen by the rational individual. Rational behaviour is not solely driven by monetary gain, but can also be driven by emotional motives. The theory can be applied to general settings outside of those identified by costs and benefits. In general, rational decision making entails choosing among all available alternatives

5565-406: The alternative that the individual most prefers. The "alternatives" can be a set of actions ("what to do?") or a set of objects ("what to choose/buy"). In the case of actions, what the individual really cares about are the outcomes that results from each possible action. Actions, in this case, are only an instrument for obtaining a particular outcome. The available alternatives are often expressed as

5670-419: The approval of others. Attaining the approval of others has been a generalized character, along with money, as a means of exchange in both Social and Economic exchanges. In Economic exchanges, it involves the exchange of goods or services. In Social exchange, it is the exchange of approval and certain other valued behaviors. Rational Choice Theory in this instance, heavily emphasizes the individual's interest as

5775-505: The assets of the government to re-pay the debt (though " Vulture funds " often find ways to do so). The recourse for the creditor is to request to be repaid at least some of what is owed. However, in most cases, debt in default is refinanced by further borrowing or monetized by issuing more currency (which typically results in inflation or hyperinflation ). Insolvency regimes around the world have evolved in very different ways, with laws focusing on different strategies for dealing with

5880-647: The assumptions and the behavioral predictions of rational choice theory have sparked criticism from various camps. As mentioned above, some economists have developed models of bounded rationality , such as Herbert Simon, which hope to be more psychologically plausible without completely abandoning the idea that reason underlies decision-making processes. Simon argues factors such as imperfect information, uncertainty and time constraints all affect and limit our rationality, and therefore our decision-making skills. Furthermore, his concepts of 'satisficing' and 'optimizing' suggest sometimes because of these factors, we settle for

5985-504: The bankruptcy estate is dealt by an official receiver, appointed by the court. In some cases the file is transferred to RTLU (OR Regional Trustee Liquidator Unit) that will assess your assets and income to see if you can contribute towards paying costs of bankruptcy or even discharge part of your debts. Under the Uniform Commercial Code , a person is considered to be insolvent when the party has ceased to pay its debts in

6090-478: The best they can for themselves, given their objectives, resources, circumstances, as they seem them". Rational Choice Theory has been used to comprehend the complex social phenomena, of which derives from the actions and motivations of an individual. Individuals are often highly motivated by their wants and needs. By making calculative decisions, it is considered as rational action. Individuals are often making calculative decisions in social situations by weighing out

6195-488: The bet. Therefore, the decision to place trust in another individual involves the same rational calculations that are involved in the decision of making a bet. Even though rational theory is used in Economics and Social settings, there are some similarities and differences. The concept of reward and reinforcement is parallel to each other while the concept of cost is also parallel to the concept of punishment. However, there

6300-547: The business may continue under a declared protective arrangement while alternative options to achieve recovery are worked out. Increasingly, legislatures have favored alternatives to winding up companies for good. It can be, in several jurisdictions, grounds for a civil action or even an offence to continue to pay some creditors in preference to other creditors once a state of insolvency is reached. Debt restructurings are typically handled by professional insolvency and restructuring practitioners, and are usually less expensive and

6405-500: The case of registered commercial entities). Turkish insolvency law is regulated by Enforcement and Bankruptcy Law (Code No: 2004, Original Name: İcra ve İflas Kanunu). The main concept of the insolvency law is very similar to Swiss and German insolvency laws. Enforcement methods are realizing pledged property, seizure of assets and bankruptcy. In the United Kingdom , the term bankruptcy is reserved for individuals. Insolvency

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6510-444: The choice process, but rather it helps predict the outcome and pattern of choice. It is consequently assumed that the individual is a self-interested or “ homo economicus ”. Here, the individual comes to a decision that optimizes their preferences by balancing costs and benefits. Rational choice theory has proposed that there are two outcomes of two choices regarding human action. Firstly, the feasible region will be chosen within all

6615-413: The choices they make. Even though some may be done sincerely for the welfare of others at that point of time, both theories point to the benefits received in return. These returns may be received immediately or in the future, be it tangible or not. Coleman discussed a number of theories to elaborate on the premises and promises of rational choice theory. One of the concepts that He introduced was Trust. It

6720-420: The company and distributes funds realised to creditors according to their priorities, after the deduction of costs. In the case of Sole Trader Insolvency , the insolvency options include Individual Voluntary Arrangements and Bankruptcy . It can be a civil and even a criminal offence for directors to allow a company to continue to trade whilst insolvent. However, two new insolvency procedures were introduced by

6825-439: The company pay that bill unless it will directly help all their creditors. For example, an insolvent farmer may be allowed to hire people to help harvest the crop, because not harvesting and selling the crop would be even worse for his creditors. It has been suggested that the speaker or writer should either say technical insolvency or actual insolvency in order to always be clear – where technical insolvency

6930-498: The degree with which we desire a particular object. This consideration has been used to suggest that maybe preference, and not desire, is the more fundamental notion. In Insolvency , the term can be used to describe when a company pays a specific creditor or group of creditors. From doing this, that creditor(s) is made better off, than other creditors. After paying the 'preferred creditor', the company seeks to go into formal insolvency like an administration or liquidation. There must be

7035-483: The desire to produce the effect of the preference. For these purposes, therefore, the relevant time is the date of the decision, not the date of giving the preference. Insolvency In accounting , insolvency is the state of being unable to pay the debts , by a person or company ( debtor ), at maturity ; those in a state of insolvency are said to be insolvent . There are two forms: cash-flow insolvency and balance-sheet insolvency. Cash-flow insolvency

7140-410: The elements of this set in terms of his preferences in an internally consistent way (the ranking constitutes a total ordering , minus some assumptions), and the set has at least one maximal element . The preference between two alternatives can be: Research since the 1980s sought to develop models that weaken these assumptions and argue some cases of this behaviour can be considered rational. However,

7245-432: The empirical finding that, contrary to standard preferences assumed under neoclassical economics, individuals attach extra value to items that they already own compared to similar items owned by others. Often preferences are described by their utility function or payoff function . This is an ordinal number that an individual assigns over the available actions, such as: The individual's preferences are then expressed as

7350-400: The empirical outputs of rational choice theory have been limited. They contend that much of the applicable literature, at least in political science, was done with weak statistical methods and that when corrected many of the empirical outcomes no longer hold. When taken in this perspective, rational choice theory has provided very little to the overall understanding of political interaction - and

7455-545: The field of economic methodology. Further, they outlined an alternative vision to neo-classicism based on a rationalist theory of knowledge. Within neo-classicism, the authors addressed consumer behaviour (in the form of indifference curves and simple versions of revealed preference theory ) and marginalist producer behaviour in both product and factor markets. Both are based on rational optimizing behaviour. They consider imperfect as well as perfect markets since neo-classical thinking embraces many market varieties and disposes of

7560-580: The future; therefore it is useful in creating effective public policy, and enables the government to develop solutions quickly and efficiently. Despite the empirical shortcomings of rational choice theory, the flexibility and tractability of rational choice models (and the lack of equally powerful alternatives) lead to them still being widely used. Rational choice theory has become increasingly employed in social sciences other than economics , such as sociology , evolutionary theory and political science in recent decades. It has had far-reaching impacts on

7665-403: The highest utility income from government action’, using rational choice theory to explain people's income as their justification for their preferred tax rate. Downs' work provides a framework for analyzing tax-rate preference in a rational choice framework. He argues that an individual votes if it is in their rational interest to do so. Downs models this utility function as B + D > C, where B

7770-405: The individual being able to say which of the options they prefer (i.e. individual prefers A over B, B over A or are indifferent to both). Alternatively, transitivity is where the individual weakly prefers option A over B and weakly prefers option B over C, leading to the conclusion that the individual weakly prefers A over C. The rational agent will then perform their own cost–benefit analysis using

7875-431: The individual level a group of people may have common interests, applying a rational choice framework to their individually rational preferences can explain group-level outcomes that fail to accomplish any one individual's preferred objectives. Rational choice theory provides a framework to describe outcomes like this as the product of rational agents performing their own cost–benefit analysis to maximize their self-interests,

7980-402: The insolvent. The outcome of an insolvent restructuring can be very different depending on the laws of the state in which the insolvency proceeding is run, and in many cases different stakeholders in a company may hold the advantage in different jurisdictions . In Anguilla , the insolvency of individuals is regulated under the Bankruptcy Act (Cap B.15) and corporate insolvency is governed by

8085-452: The institutional structures of modern capitalist society, or something approximating them. But this way of looking at matters systematically neglects the ways in which modern capitalist society and its social relations in fact constitute the ‘rational’, calculating individual. The well-known limitations of rational-actor theory, its static quality, its logical antinomies, its vulnerability to arguments of infinite regress , its failure to develop

8190-551: The invisible hand. Rationality can be used as an assumption for the behaviour of individuals in a wide range of contexts outside of economics. It is also used in political science , sociology , and philosophy . The basic premise of rational choice theory is that the decisions made by individual actors will collectively produce aggregate social behaviour. The theory also assumes that individuals have preferences out of available choice alternatives. These preferences are assumed to be complete and transitive. Completeness refers to

8295-496: The model can be abstract, but they cannot be endowed with powers actual agents could not have. This also undermines methodological individualism; if behaviour cannot be reliably predicted on the basis of the ‘rational choices of agents’, a social order cannot reliably follow from the choices of agents. The validity of Rational Choice Theory has been generally refuted by the results of research in behavioral psychology. The revision or alternative theory that arises from these discrepancies

8400-465: The most typical definition employed in psychology. It does not mean that a preference is necessarily stable over time. Preference can be notably modified by decision-making processes, such as choices , even unconsciously. Consequently, preference can be affected by a person's surroundings and upbringing in terms of geographical location, cultural background, religious beliefs, and education. These factors are found to affect preference as repeated exposure to

8505-461: The national audience. The use of rational choice theory as a framework to predict political behavior has led to a rich literature that describes the trajectory of policy to varying degrees of success. For example, some scholars have examined how states can make credible threats to deter other states from a (nuclear) attack. Others have explored under what conditions states wage war against each other. Yet others have investigated under what circumstances

8610-441: The outcome. Risk tolerance is a critical component of personal financial planning, that is, risk preference. In psychology, risk preference is occasionally characterised as the proclivity to engage in a behaviour or activity that is advantageous but may involve some potential loss, such as substance abuse or criminal action that may bring significant bodily and mental harm to the individual. In economics, risk preference refers to

8715-442: The possible and related action. Second, after the preferred option has been chosen, the feasible region that has been selected was picked based on restriction of financial, legal, social, physical or emotional restrictions that the agent is facing. After that, a choice will be made based on the preference order. The concept of rationality used in rational choice theory is different from the colloquial and most philosophical use of

8820-484: The prescribed form) requiring the company to pay the sum so due and the company has for 3 weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor,... (2) A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities... A company which

8925-493: The price obtainable for the assets would be reduced. In addition to the above-mentioned corporate insolvency procedures, a creditor holding security over an asset of the company may have the power to appoint an insolvency practitioner as administrative receiver or, in Scotland , receiver. The process, latterly known as administrative receivership or, in Scotland, receivership, has existed for many years and has often resulted in

9030-460: The pros and cons of an action taken towards a person. The decision to act on a rational decision is also dependent on the unforeseen benefits of the friendship. Homan mentions that actions of humans are motivated by punishment or rewards. This reinforcement through punishments or rewards determines the course of action taken by a person in a social situation as well. Individuals are motivated by mutual reinforcement and are also fundamentally motivated by

9135-483: The rationale that goes behind decisions on whether to marry or divorce another individual. Due to the self-serving drive on which the theory of rational choice is derived, Becker concludes that people marry if the expected utility from such marriage exceeds the utility one would gain from remaining single, and in the same way couples would separate should the utility of being together be less than expected and provide less (economic) benefit than being separated would. Since

9240-514: The rehabilitation and continuation of their business. This is known as business turnaround or business recovery . Implementing a business turnaround may take many forms, including keep and restructure, sale as a going concern, or wind-down and exit. In some jurisdictions, it is an offence under the insolvency laws for a corporation to continue in business while insolvent. In others (like the United States with its Chapter 11 provisions),

9345-478: The relation between these ordinal assignments. For example, if an individual prefers the candidate Sara over Roger over abstaining, their preferences would have the relation: A preference relation that as above satisfies completeness, transitivity, and, in addition, continuity , can be equivalently represented by a utility function. The rational choice approach allows preferences to be represented as real-valued utility functions. Economic decision making then becomes

9450-539: The relationship between preference can be described by a utility function . This is because the axioms allow for preferences to be ordered into one equivalent ordering with no preference cycles. Maximising utility does not imply maximise happiness, rather it is an optimisation of the available options based on an individual's preferences. The so-called Expected Utility Theory (EUT) , which was introduced by John von Neumann and Oskar Morgenstern in 1944, explains that so long as an agent's preferences over risky options follow

9555-765: The sense that the introduction of risk has no clear association with the decision maker's choice. The mathematical foundations of most common types of preferences — that are representable by quadratic or additive functions — laid down by Gérard Debreu enabled Andranik Tangian to develop methods for their elicitation. In particular, additive and quadratic preference functions in n {\displaystyle n} variables can be constructed from interviews, where questions are aimed at tracing totally n {\displaystyle n} 2D-indifference curves in n − 1 {\displaystyle n-1} coordinate planes without referring to cardinal utility estimates. Empirical evidence has shown that

9660-406: The social situation as one navigates the risks and benefits of an action. By assessing the possible outcomes or alternatives to an action for another individual, the person is making a calculated decision. In another situation such as making a bet, you are calculating the possible lost and how much can be won. If the chances of winning exceeds the cost of losing, the rational decision would be to place

9765-437: The specific claims of robust neoclassicism fade into the history of economic thought, an orientation toward situating explanations of economic phenomena in relation to rationality has increasingly become the touchstone by which mainstream economists identify themselves and recognize each other. This is not so much a question of adherence to any particular conception of rationality, but of taking rationality of individual behavior as

9870-504: The standard economic model. It also recognises that rational preferences and choices are limited by heuristics and biases . Heuristics are rules of thumb such as elimination by aspects which are used to make decisions rather than maximising the utility function . Economic biases such as reference points and loss aversion also violate the assumption of rational preferences by causing individuals to act irrationally. Individual preferences can be represented as an indifference curve given

9975-442: The study of political science , especially in fields like the study of interest groups, elections , behaviour in legislatures, coalitions , and bureaucracy . In these fields, the use of rational choice theory to explain broad social phenomena is the subject of controversy. Rational choice theory provides a framework to explain why groups of rational individuals can come to collectively irrational decisions. For example, while at

10080-421: The theory behind rational choice is that individuals will take the course of action that best serves their personal interests, when considering relationships it is still assumed that they will display such mentality due to deep-rooted, self-interested aspects of human nature. Social Exchange and Rational Choice Theory both comes down to an individual's efforts to meet their own personal needs and interests through

10185-447: The threat and imposition of international economic sanctions tend to succeed and when they are likely to fail. Rational choice theory and social exchange theory involves looking at all social relations in the form of costs and rewards, both tangible and non tangible. According to Abell, Rational Choice Theory is "understanding individual actors... as acting, or more likely interacting, in a manner such that they can be deemed to be doing

10290-486: The transaction is a result of ordinary commercial considerations. Also, under the English Insolvency Act 1986 , if a creditor was proven to have forced the company to pay, the resulting payment would not be considered a preference since it would not constitute unfairness. It is the decision to give a preference, rather than the giving of the preference pursuant to that decision, which must be influenced by

10395-400: The underlying assumptions. Indifference curves graphically depict all product combinations that yield the same amount of usefulness. Indifference curves allow us to graphically define and rank all possible combinations of two commodities. The graph's three main points are: Risk preference is defined as how much risk a person is prepared to accept based on the expected utility or pleasure of

10500-406: The unquestioned starting point of economic analysis. Foley (2003, p. 9) went on to argue that The concept of rationality, to use Hegelian language, represents the relations of modern capitalist society one-sidedly. The burden of rational-actor theory is the assertion that ‘naturally’ constituted individuals facing existential conflicts over scarce resources would rationally impose on themselves

10605-468: The usage of rational preferences (and Rational Choice Theory ) does not always accurately predict human behaviour because it makes unrealistic assumptions. In response to this, neoclassical economists argue that it provides a normative model for people to adjust and optimise their actions. Behavioural economics describes an alternative approach to predicting human behaviour by using psychological theory which explores deviations from rational preferences and

10710-441: The utility function of individual voters. Rational choice theory has become one of the major tools used to study international relations. Proponents of its use in this field typically assume that states and the policies crafted at the national outcome are the outcome of self-interested, politically shrewd actors including, but not limited to, politicians, lobbyists, businesspeople, activists, regular voters and any other individual in

10815-412: The view that the natural science model is the only appropriate methodology in social science and that political science should follow this model, with its emphasis on quantification and mathematization. Schram and Caterino argue instead for methodological pluralism. The same argument is made by William E. Connolly , who in his work Neuropolitics shows that advances in neuroscience further illuminate some of

10920-689: The word. In this sense, "rational" behaviour can refer to "sensible", "predictable", or "in a thoughtful, clear-headed manner." Rational choice theory uses a much more narrow definition of rationality. At its most basic level, behavior is rational if it is reflective and consistent (across time and different choice situations). More specifically, behavior is only considered irrational if it is logically incoherent , i.e. self-contradictory. Early neoclassical economists writing about rational choice, including William Stanley Jevons , assumed that agents make consumption choices so as to maximize their happiness , or utility . Contemporary theory bases rational choice on

11025-487: Was adopted 1935. Those who claim inability are temporary exempt from debt payment. In Ireland , insolvency is governed by the Companies Act 2014 . In Russia, insolvency law is governed by Federal Law No. 127-FZ "On Insolvency (Bankruptcy)" and Federal Law No. 40-FZ "On Insolvency (Bankruptcy) of Credit Institutions". In South Africa , owners of businesses that had at any stage traded insolvently (i.e. that had

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