Is complete rationality a practical concept?

Bounded Rationality

Why it is important to introduce the concept of bounded rationality and connect it with decision making process? Is it not better to be completely rational and take decisions because according to economic models and its assumptions, an individual is always considered to be a rational individual who takes decision to maximize its satisfaction within the limited resources?

Samarth was tired of living in a rented flat and always dreamt of owning a flat. To make it a reality he decides to buy a flat in his own locality where it is expensive than other localities. His emotional attachment to the locality clouds his judgement of not looking for a flat in another locality with same facilities and satisfaction but at a lower price. A rational behavior would have been to look for a flat in some other locality where the money to be paid to get same satisfaction would have been less.

 

Factors that influence decision making process

Why did Samarth take a decision which would not give him maximum satisfaction with respect to economic models? There is a shift from rational behavior because in reality, human decisions are not taken only with respect to rationality as assumed by the economic models.

A person wants to sell his car. He gets two buyers, one who knows everything about cars and the other one has little bit information about cars. For the other person, due to limited information about the product there are higher chances that he would not be able take a rational decision. The choice that an individual prefers is governed by factors like socio-economic background, size of basket and time constraint to make the choice. Similarly decision making process of selecting or preferring one option and not the other or go for some other option which would provide less satisfaction is due to emotion, cognitive limits, limited information, information asymmetry and time constraint. As our mind is not free to take rational decisions, bounded rationality is the best option for taking decisions with the time and information.

 

Role of human psychology in decision-making process

The decision-making process for each and every individual is different, for some its spontaneous and for some it’s a long process. If the time is utilized efficiently, there are more chances of the decision to be rational but if a person is procrastinating to come up with a decision, time spent would be in vain and the outcome may not be a rational decision.

An individual or market always pushes its boundaries to become rational within the given time with limited information. But in order to do so, it is important that they know what is rationality, how it affects decision-making and its consequences. Behavior of an individual as rational, bounded rational or irrational goes hand in hand with human psychology. Many times, people take decisions intuitively resulting to an action that would be appropriate to them but not for economists who have formulated all their models with the assumption of individual as rational. Since everyone don’t opt to study economics and act rationally, many other factors also cling to their decision-making process and the action taken further. So for economic models to work efficiently in reality, it is necessary to stress on concept of bounded rationality which along with economics also take psychology and other fields into consideration to act in such a way that it justifies all the types of satisfaction an individual wants.