The role of Bounded Rationality in decision making

In the world today a consumer is king they have access to vast supply of information, a huge array of choices between goods, more and more better value for money deals and easy availability of goods, one might even say that we are as close to the mythical homoeconomicus (a perfectly rational human being) as one can get, despite this we are still very much subject to bounded rationality. Bounded rationality refers to the idea that in decision making our rationality is limited by the available information, limitations of our cognitive ability and the time available to us. Essentially even with in this world overflowing with information there is only a finite amount we can know ( also the idea that we never know everything about anything) most of which is limited to what we can comprehend and choose to remember, but most importantly in the process of decision making we have a time barrier on us and cannot afford to look up the internet for information but instead have to rely on what we know. Bounded rationality is an important concept in behavioural economics as it shows us a ways in which the actual decision making process influences the final decisions made.

Human aspects of decision making

Human beings are complex animals our behaviour is often uncharacteristic and deviates regularly from expected behaviour; we are subject to influences from our surrounding and often place more weight than we should on the opinions of people around us. While this might not be particularly problematic for us it does make us prone to impulsive behaviour, this can be either good or bad depending on the context.  For example in a game of poker a particular individual may have a tell while bluffing (say he taps his fingers or makes movements with his eyes) you could use this tell to bet against him, but this doesn’t guarantee your winnings and it might be the case that you are getting set up to be swindled, thus showing that we are not particularly great decision makers as we are avoiding the safest way of winning in trusting the math, and get easily caught up in the moment. It is also highly likely for us to live under the assumption that we are making the rational choice, without even considering other alternatives. I remember when I moved to college I would often frequent a restaurant near college with my friends and in some situations would have all my meals from there, I believed that this was the best value I could get and did not vary much from this place; towards the end of the year however I had discovered other places to eat and had realised that I could gain the same amount of satisfaction from other places as well. In this example my lack of willingness to try new alternatives hindered my judgement and even without proper verification led me to make a choice. My choice in this case was uninformed and untested against other alternatives as is this case with most of our choices in our increasingly consumerist society.

What role does human psychology play in decision making?

As discussed earlier humans are emotional and irrational in their behaviour. Many times we ignore our rational decision making process and let ourselves be influenced by other factors. Many companies know this and try to use this to their advantage they’ll try to sell you goods that you don’t actually need, they use various marketing techniques and forms of advertisements to convince, rather than appealing to your necessities they’re appealing to your desires. Take the example of smart watches, unless you’re a professional athlete or immensely into working out there is no particular reason to need one but seeing someone use it or checking out all of its features may convince you to buy it even though you have no particular need for it.

Conclusion

Bounded rationality is an ever present part of the decision making process, we will never truly be able to get perfect information or make the best decision but despite this we can use our knowledge of this and strive to attain better goods and higher satisfaction. It also plays an important part in the business cycle as it is because of this belief that we can get more satisfaction from a better good that we keep buying more products, it is also a motivator for producers to produce better goods as they could make goods that give us more satisfaction.