Rationality and Decision making

Oftentimes, we consider ourselves as "Homo economicus" who is known to have full information on the variety of products at his fingertips, total knowledge of the implications of selecting the particular choice, and to make optimal decisions that maximize his utility.

We often realize, however, that even the most sensitive person's day-to-day decisions are not perfectly rational.

So why do we end up making such irrational decisions?

This issue has for long-time puzzled economists and psychologists until an American economist and political scientist Herbert Simon came up with the concept of "Bounded Rationality".

Bounded Rationality is the idea that when individuals make a decision their viewpoint is limited by the cognitive limitations, and time available to make decisions.

Rationality is bounded because of the available information, the time limit for making a decision, cognitive ability. The concept of bounded rationality is one of the foundations of Behavioural economics.

Perfectly rational decisions are not feasible for Homo Sapiens because at any given point of time there finite knowledge of the resources available and the lack of foresing many possible consequences of the particular decision taken.

Imagine at any given point of time you decide to buy a book and for the same, you started surfing the online stores, and after wandering in some sites you get the book you needed at the minimum price.

But after a month you realize the same book is available at the book shop next door at half the rate!

We come across a lot of such instances every day, because of these limitations, people finally make a sufficiently good decision rather than the best decision possible.

How do emotions shape our decisions?

Emotions play a very important role in our decision-making process, in reality, every decision we make and every action we do have an emotion connected with it. Such feelings often contribute to making choices that are biased in nature and completely irrational.

The environment we live in, friend circle and education play a vital role in maintaining the positivity or negativity of our emotions. And further, these sets of emotions shape our day to day decisions.

 Example when we are in a positive mood, we make optimistic decisions which may or may not be rational, whereas when we are in a negative mood, we are more likely to take negative decisions which can have a severe effect on the future.

Therefore, over pessimism and over-optimism can result in clouded thinking which may lead to poor decision making, hence it is important to be cautious and check our emotions while taking decisions.

Besides bounded rationality and emotion, many other factors influence our decision-making process. In the dynamic environment, we are living in, it is important to understand these concepts for better decision-making ability. This limitation of human beings allows economists and psychologists to further research these topics. Behavioural economics is one such science which explores the concept of individual and collective rationality, and how bounded rationality is the obstacle that causes individuals to make unprofitable decisions.