Seminar paper from the year 2010 in the subject Politics - Basics and General, grade: A, University of Toronto, course: Policy Analysis, language: English, abstract: This paper will elaborate on the nature of human decision making under conditions of uncertainty. Unlike other rational choice studies, it will not claim that the rational choice approach can explain every phenomenon, but rather that the method`s explanation depends on structural constraints, within which individual choices are made. In the end, this merger of the rational and institutionalist approaches in one complex model is should present a fundamental strength in explaining complex interdependence of human actions. The paper is based on assumption that even the concept of bounded rationality does not allow to capture the whole role of unreason in human affairs, and thus to explain it one needs to look at the environment (formal constraints and information). I do not deny the fact that human behaviour is subject to random errors. However, it is assumed that people's intentions to behave rationally (i.e. consistent and adequately responsive to the reality) may fail due to imperfect institutional arrangements and incomplete information available at each particular point of time. In disequilibrium situations, reliance on intuition and emotions significantly increase. However, this does not invalidate the theory of rationality. Nor does it undermine the role of institutions (both formal and informal) in shaping human behaviour. This study will use the case of the current financial crisis which is largely described as a challenge to our assumptions about economic behaviour and the process of rational decision-making. It will argue that rational institutionalist arguments may be usefully applied to understand human behaviour and decision making leading up to the current financial crisis. From this perspective, financial regulators failed to come up with efficient rules of the game in view of increasing uncertainty induced by constantly changing financial markets (informal institutional redesign); market actors, on the other hand, were completely rational in a sense that their actions were motivated by the idea of profit maximization. The ultimate purpose of this paper is to examine what implications this case suggests for theory and policy, with particular attention to markets and government.