Is it possible to be fully rational?

Rationality. An assumption for many economic models. An expectation from most human beings. A difficult concept to achieve completely over a lifetime of decisions.

One more than one occasion you may have told someone to be “rational” in a situation. Rationality expects you to make the best decision for yourself in a manner where you feel fully satisfied with your choices and receive maximum benefit. Now really thinking about the advice you gave earlier, did they get the maximum benefit from their decision and feel fully satisfied? Probably not, because as a human being, your past experiences, personal biases and incomplete information about a situation may not allow you to make the best decision possible.

 Let’s take a simple example. You walk into a supermarket, to buy some orange juice for your family on a hot summer day. You are presented with three brands which offer different benefits in their juices. One says that it has no added preservatives, one says it has no added sugar and one says that it has zero calories. You aren’t sure which one is the best decision for you and your family at the moment, but since you’ve seen an advertisement about brand 3 on many occasions, you choose it and run home and enjoy a good drink with everyone. This is your Bounded Rationality.

As a concept, Bounded Rationality expects that human beings do not have complete information about the choices given to them, have personal biases or cognitive limitations and a time constraint to make their decision which does not allow them to gain all the information they need to make the most informed decision.

In the above example about orange juice, we came to see a real-life application of the role of incomplete information hindering an individual’s attempt to make the best decision. Given that you did try to gain the full information about all three juices by measuring and comparing the sugar, calories, benefits etc, asking people who consumed the juices about their feedback on it and tasted a sample of each, you would’ve probably been able to make an optimal decision. But that is not the most feasible option for you and you picked whatever your intuition told you was the best option.

 You also can’t ignore the fact that your family is waiting at home! This also depicts a time constraint which does not allow you to gather more information and make a better decision.

There are a lot of instances when the manner in which a human being receives information, affects their decision-making capacity or we can also say that it influences them in favor of or against certain things. This phenomenon is a cognitive bias.

When an individual’s decision or choices are influenced by the fact that majority of others are doing the same, it is called the Bandwagon Effect. For example, someone starts smoking tobacco because everyone around them is doing so, even though it may not be the best choice for them.

The phenomenon that people expect someone to be an expert in all areas because they prove their excellence in one area is termed as the Halo Effect. For example, when someone buys a variety of goods from one brand because they liked a particular product that they are known for. It isn’t a given that the other products may be as good as the one before, but that is an inbuilt effect in the human brain.

   

When someone feel extremely confident about their judgement or rather overconfident, it is known as the Overconfidence bias. For example, a lawyer who has won his last three consecutive cases, may be overconfident and think that he is on a winning spree, which may not be the best attitude for his next case as his ego might come in the way of his decision making.

The bias that arises when someone has held an opinion about a product in their mind, derived from previous experiences, in a manner where more information is not able to alter their opinion is known as the Anchoring Bias. For example, when your friend has had a bad experience with a certain face cream she used, you may feel that is not good for you either even when it has proven results for your skin type. Your friend’s bias may arise from the fact that the cream was not made for her skin type but this has altered your opinion for a useful product as well.

Conclusion

These biases depict that there may be a lot of limitations in a human being’s life which may not allow them to make the most rational decisions. There are many more reasons why and it is very important to understand that human beings are far more complicated than we can see them to be. Therefore, it becomes important to study their behavior in an economy in order to better understand them and make rational decisions, if any possible at all!