Bounded Rationality

Bounded Rationality: Making Better Decisions

Bounded Rationality: Making Better Decisions

Bounded Rationality is an economic term or bias visible in our daily decision-making process. Here, we try to seek satisfaction rather than optimization.

To put it better, we are naturally wired to take a decision that is good enough rather than take the best possible decision. I’d give you an example.

I recently went to get some electronics like Microwave, Freezer, etc. For most of these devices, I was presented with two options.

  1. High energy consumption but low cost.
  2. High cost but low energy consumption

Because I was working with a limited budget, I ended up with option 1 for all the devices I bought. But, in retrospect, that’s a wrong decision because I will end up paying more money to power these devices in the long run.

Meanwhile, option two would have been a better decision to make, only that it was a little more costly than option 1 in the short run but cheaper in the long run. The price difference in the present wasn’t that bad.

In essence, what happened at that point was that I went for the option that satisfied me at the moment while ignoring the better or optimized option.

This is what Bounded Rationality is all about. My focus was simply the price point at that moment, which bound my ability to make the better choice. Although, I did not fully understand why I should buy a device that is more expensive but consumes less power until much later.

Bounded Rationality is usually a result of a lack of information about all the possible options. As such, we make decisions based on the information we have. In my case, it was the price point.

When we fail to have all the available information about the available options, we tend to make just good enough decisions leaving out the better option on the table.

Humans are wired to make just good enough decisions rather than the best decisions which leads us to make choices that are inconsistent with who we are or what we represent.

We often think we are rational when making decisions, but many times, we make decisions based on our ignorance and sentiments.

A good understanding of bounded Rationality does not mean we wouldn’t still make just good enough decisions considering we cannot access all the information on every option on the table. Plus, it is virtually impossible to have information about every option when making decisions.

Instead, this would be useful when making major, life-changing decisions. It helps you ask difficult questions.

Good enough decisions do not mean good decision-making. Unfortunately, many of us stick to average because our Rationality is bounded, and we make no effort to search for more information to make better decisions.

Take stock of your life decisions and review them. Did you make the right decision? Did you get all the information you needed? Can you review your options?

Mediocrity is usually a result of poor information on all available options. As such, we tend to go for the easy option and not the best option.

to be continued…

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  1. Wow..

    This is profound.

    I like the fact that you pointed out that it could be virtually impossible to have all the information you need to make a decision at a particular time. I think this is because of the window of time you have to make the decision. We might not be as lucky all the time.

    Regardless, the knowledge would be useful when making major, life-changing decisions, as it will help ask difficult questions.

    Thanks for this piece.

    Enjoyed it.

  2. Instead of looking out for the best option, we go for the lesser evil because we lack the right information about a particular thing or people. I’m patiently waiting to continue reading.

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