The 3 human limitations that get in the way of our rational decision-making

Be it about money matters or other important decision-making, our "Emotional Emong" usually gets in the way such that we are not always able to make the best choices in life. Jolls, Sunstein, and Thaler discuss these limitations and human complications in their study titled "A Behavioral Approach to Law and Economics." Let me outline them for you in light of the Pinoy context. 

1. Bounded rationality – Although we would like to believe that we are rational beings who are always minimizing cost and maximizing utility the way standard economic theories portray consumers, the reality is that we cannot easily and readily compute for opportunity cost each time we decide on what to buy, how much to save, invest, etc. 

Herbert A. Simon, economist, psychologist, sociologist, computer scientist, and Nobel laureate, introduced this concept of bounded rationalityin 1956. The human being’s decision-making is limited by the tractability (controllability and manageability) of the problem, the cognitive (understanding/comprehension) capacity of the mind, and the time available to make the decision. Instead of optimal decision-making, we are only capable of satisficing—a combination of satisfy and suffice. 

Let’s take an example. Just like the regular person, you check your phone at night before you sleep. You get a prompt from your shopping app of a new arrival gadget, the one you’ve been reading about. You looked at the nifty gadget and it spoke to you, “Buy me! Buy me!” Can you run in your head what other things you can buy with the amount equivalent to the price of the gadget? It can be an additional deposit to your travel fund that will shorten your waiting period, an additional investment to your retirement fund that can improve your lifestyle in your 60s, a meal with your family that can help update you with what’s happening to your teenaged kids, and many many more. 

2. Bounded willpower– This is our self-control limitation. “The mind is willing but the body is weak.” We find it hard to make decisions that are good for us in the long-term even if we already know the benefits. 

Going back to our example in no. 1, let’s suppose you already went through the motions of