Rational choice theory

Decision making is a critical function of management. Managers are required to make decisions such as who should their suppliers be, what price should they set for their products, and should they invest in new accounting software. This chapter introduces the rational choice theory (RCT) as a basis for understanding how and why such choices are made in organisations. The chapter proceeds as follows: the key features of the theory are presented in section two; section three discusses the concept of ‘bounded rationality’, which was developed in direct response to the narrow view of decision making offered by the economic versions of RCT; organisational links to RCT follow in section 4 including descriptions of both Weber’s bureaucracy and Principal-agent theory; the chapter then introduces RCT’s link to accounting and provides a future research agenda in section 5; and concluding remarks are offered in section 6.