All along economists have believed in the common myth that the market consists of rational consumers who make correct and well informed decisions at ease. When fed with a lot of information, one would argue that the more information they receive, the better they will be able to make decisions to optimally suit their needs.
Right? Wrong.
Reality
Economics would say that giving more information leads to better decision making but if given too much information, people’s decision making gets worse.
In actuality, constant feed of information can put one into a state of information overload.
Not only can they not get access to all the information required, but even if they could, their minds would be unable to process it properly. The human mind necessarily restricts itself.
It is, as Herbert Simon put it, bounded by “cognitive limits”. We usually use a simple rule of thumb technique to make decisions. Our decision making is influenced in a way to make us choose satisfactorily, that is we find something “good enough” which suffices instead of finding the “best”. Let’s look at an example of this in the retail environment. Consider a person walks into a footwear store to purchase black shoes for a wedding he must attend the very same day. Now consider that the person does not find black shoes of his choice and settles for purchasing navy blue shoes or brown shoes. He could’ve bought black shoes of his preference had he visited tons and tons of shoe shops across town. That in economics, is how a rational consumer behaves. However, the consumer makes a simpler decision by purchasing shoes which were reasonable enough to match his needs instead of optimizing his comfort and evaluating all his alternative options. The decision doesn’t seem like an irrational one because the consumer has a time constraint and he doesn’t know where he can find black shoes elsewhere.
Busting the Myth
When we explore the concept of bounded rationality, we challenge the concept of complete consumer rationality.
We’ve established that since we’re faced with time constraints, limited information and cognitive limitations, we cannot solve problems optimally so we take short cuts by employing principles and rules to save on mental energy and time processing. In simpler words we cannot process a vast multitude of information so we find it easier focus on one or two important factors.
For example, we might purchase a lipstick because it’s “not tested on animals” or we might purchase a car because it “saves fuel”. Let us apply this concept while making a simple purchase. Many of us try to adopt healthier lifestyles and so when it comes to purchasing a particular type of snack, the obvious question that arises is “what makes the snack healthy?”. As per economics, a rational consumer would make a well informed decision taking into account various factors like features, price, and nutritional information while comparing different snacks in a grocery store isle to make the most value maximising decision. In real life however, consumers will be more likely to satisfy themselves with simpler criterion or some broadly general principle so that the snack is healthy “enough” rather than being the healthiest, for example, a simple “99% fat free” or a “whole grain food” sticker would suffice in helping a consumer choose one snack over the other. They’re satisfied in their choice without having to consider their different alternatives.
Summing It Up
In order to be boundlessly rational, a person needs to have a set parameter for success and he isn’t satisfied until and unless he achieves anything less than what is the best possible outcome with respect to this parameter. This is not what we see in a real life scenario.
It brings us back to the point where classical economics fails to understand that as much as economics studies human behaviour as rational, it fails to take into account how emotions influence that rationality and the behavioural inconsistencies a real life economy faces.
Written By
Shreya Kumar
Image Credits: Google Images
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