Rationality looks good in books

In economics we assume that everyone makes a rational decision to reach an optimal state provided that we have all the resources such as information, time, money etc. to make such a decision. Rational decision looks good in books but can’t be seen in real life.

Factors influencing one's decision (Source-KNOWeScape)

No one has all the above stated resources to make a decision, they are bound by one thing or another.

Thus, leading us to make decisions within the limited resources we have- wherein bounded rationality comes into play. Bounded rationality is an idea where we make satisfactory decisions within the limits of information, resources available and mental capabilities.

Being a satisficer

Instead of reaching the bliss optimal state we reach a satisfactory state when we talk about bounded rationality. People who take such decisions are called satisficers who do not put too much effort in making a flawless decision but choose something that will just be enough to satisfy their needs and wants. Satisficers don’t make consistent decisions, their decisions are affected by emotions, ethics, moral-social values, peer pressure etc.

Irrational Decisions

We make irrational decisions too- for a third person looking at our decision, it might look completely irrational and absurd. But to one’s own eye such a decision it would be the most rational one. For instance we buy products that don't fit our budget, choose a significant other with whom we have zero compatibility and have nothing much common with but just fall for him/her, or stepping out of our homes for no reason whatsoever while the entire nation is in a pandemic lock down.

Why do we make such decisions knowing that they are far from rational?

To answer this we enter the space of cognitive psychology. There has been research done which points out how factors like cognitive biases, belief in personal relevance, past experience, sunk outcomes and escalation of commitment influence a person’s choice.

Cognitive biases are thinking patterns based on observation and generalization that may lead to memory errors, inaccurate judgement and faulty logic (Evans, Barston, & Pollard, 1983; West, Toplak, & Stanovich, 2008). There are 12 cognitive biases that can impact one’s decision. 

Here we will look at 2 of these biases-

When you are in class and the teacher takes a poll on whether a statement is true or false, everyone in class favors true while you believe it's false. But seeing the entire class favoring true, you are most likely to doubt your instinct and take a decision of the statement being true too. This is called the Bandwagon effect- a person is more likely to go along with belief if there are many others who hold that belief - this is also called herd mentality.

Bandwagon Effect

Shekar goes to the mall’s food court for lunch. He decides to have a burger from McDonald's as well as one from KFC, he finds that the burger in McDonald's is better than KFC. So, he presumes that if McDonald's Burger was better so their smoothies too would be better than KFC and  he ultimately buys a smoothie from McDonald's (McCafe). 

McDonald's Vs KFC 

To Shekar the first impression counted and he decided accordingly- this is called the Halo effect- where you judge others similarly on all traits, assuming that because someone is good or bad at one thing they will be equally good or bad at another.

Escalation of commitment is the other factor that influences an individual's decision making . For instance you continue investing your time and energy on a job that is not getting you where you want to be - been trying to climb up the corporate ladder but it never seems to happen. The long hours, meetings, late night calls still haven't paid off.

Source- Andrew Matthews

You have a choice of quitting and working at a better company where you may be rewarded for your efforts with future prospects. But you stay put! You decide to stay committed to this job- not wanting to start all over again, don’t want to abandon your current job since you worked hard to be there and ultimately its difficult to just leave. This is what escalation of commitment is about-it is where one continues to dedicate resources including time and money, to a falling course of action.

 Conclusion

People make several decisions in their life, it can be financial, relationship, job, medical decisions etc. The decision taken leads to several outcomes like regret, satisfaction, etc. Research has shown that people favour reversible decisions.

In recent times decision making isn’t just restricted to weighing the pros and cons but also it is about making quicker, effective decisions and in a simplified manner. Human psychology plays a major role that impacts one’s choices and decisions, giving scope for future research in this field of behavioral studies.