HUMAN DECISIONS AND RATIONALITY

We all are aware that rationality plays a huge role in governing the decisions we make. But like all human competences and qualities, rationality too has its precincts and shortcomings. Not all our

decisions can be backed with complete rationality but its existence cannot be ruled out either. So the question arises, how rational are we?

ARE WE UN-RATIONAL?

Economics is a study that deals with human beings and how they try to utilise the scarce resources available to them in order to satiate their needs. Now human beings are complex creatures and usually differ from one another. For example, I might like vanilla ice cream more than strawberry. You might be of a different opinion. Somebody else, might like chocolate ice cream more than any. This disparity makes it difficult to confine human beings into standard theories of universal rational behaviour. 

Ideally, all humans wish to hold all the information before taking any decision. They also yearn to possess the necessary cognitive abilities in order to process the data to the maximum limits in order to make an informed and unbiased decision. But is this the case in reality? The answer is simply no. It is impossible to have complete information and the cerebral abilities to always make a 100% rational decision. This in turn, restricts our coherent desire to be rational leading us to believe in a concept called Bounded Rationality.

Bounded rationality does not necessarily mean that humans are not rational. It simply states that human beings are rational to the extent that they can be with the limited amount of resources that they have in terms of the finite amount of knowledge, cognitive abilities, and time.

TOO MUCH INFORMATION (TMI):

The human brain is a very interesting organ. It’s functioning still remains a mystery to us. Up until now, I told you why our rationality is limited by the lack of complete information that might be material to our decision-making. But what if I tell you that too much information can also be a speed-breaker for our rationality? This can be elucidated using a concept called Choice Overload. 

Choice Overload can be associated closely with ‘overchoice’ in the sense that it may lead to unhappiness, decision fatigue, and the abandonment of decision making altogether. This may also lead an individual in going with the default options available. For an example, you have been wishing to buy a custom bag for the longest time, so in order to do so, you go to an online site and begin choosing amongst various alternatives from the base level. Midway, you realise that choosing each and every attribute of the bag is too tiring and time consuming; there are too many choices to make and very little amount of time to make them. So instead of customising your bag, you end up choosing the default option available on the site.

Apart from choice overload, human also indulge in avoiding freely available information. Over the course of time, many theories have emerged to explain this phenomenon of Information Avoidance. It may be in order to reduce anxiety that is caused by brand new information. It can also be done in order to avoid information that might contradict current judgements and opinions. Additionally, it might be done due to the inherent nature of humans to avoid all sorts of uncertainties that the new information might bring with it.

But the question still prevails, how much information is too much information?

CONCLUSION:

In order to create theories that are closer to reality, it is essential to consider the psychology of the human mind and what all factors contribute to the decisions that we take. Each human being is different from the other, and has a distinctive set of morals and values that govern their rationality. What is rational to me might seem absurd to you and vice versa. Behavioural Economics, thus, argues that a number of social and psychological forces play a significant role in shaping all decisions made by any human.

Consumer Preferences And Rationality

Demand and supply have been considered, for the longest duration, the backbone of economics as they lay the fundamental principles for it. However, behind these demands and supplies are an abundant range of producers and consumers who make individual decisions based on their preferences and desires.

CONSUMER PREFERENCE:

Who are consumers? Well, any individual who acquires something in order to satiate any particular need is called a consumer i.e. in simple terms we all are consumers. We consume various commodities in our day-to-day functions without even realising it and in order to decide what to consume, we face choices that are endless. All these decisions are almost like a subconscious reflex to all our needs. However, that might not truly be the case.

Our rationality is mirrored in each decision that we make as consumers. We try our best to earmark our restricted resources in order to boost and maximise our benefits. We prefer commodities that are more advantageous and valuable in the sense that they provide us with the supreme levels of utility or in layman’s language, satisfaction. Hence, as different as these decisions might be, one thing seems to remain constant: we are always thinking at margins.

THINKING AT MARGINS:

As I mentioned before, consumers think at the margin. Now, what exactly does this mean? At the margin means to think of the next increment, the next unit that relatively tells me if my decision is actually“worth it” or not. For an example, you go 

to a fast food joint and take a look at their menu. Combo 1 offers you a burger and fries for ₹120 and Combo 2 offer you a burger, fries and a milkshake for₹200. In this scenario, what comes first to your mind when you see this in the menu? “Is the milkshake worth an additional ₹80 to me?” 

This theory of thinking at the margins helps us resolve one of the most paradoxical choices faced by economists: The Water-Diamond Paradox. Water is a life giving resource, critical to survival and yet the value of water is less than that of diamond. This is because of the simple fact that the marginal utility obtained from diamond is much more than the marginal utility of water.

WHAT IS THE BEST PREFERENCE?

Consumers are rational and hence always intend on making rational decisions with the sole objective of maximising utility. Now, utility is subjective. An athlete might obtain less satisfaction from a can of soda that might deteriorate his performance. However, I might extract an exorbitant amount of satisfaction since I don’t seem to care about my health as much as the athlete so I failed to recognise its disadvantages.

The basic point that I’m emphasizing on here is, that we make the best decisions that we can, based on our own comparisons. A doctor might think that drinking the can of soda is a senseless decision and may deem it to be irrational. I might disagree because it appeased me. 

So, there is no universal best preference as such. However, there is a best preference for me and that preference is solely dependant on my ability to compare and arrive at an inference that benefits me the most. In other words, my rationality is restricted to the extent of my ability to make a meaningful comparison and my preference will depend on it.

CONCLUSION:

Consumers are rational beings. As bounded as their rationality might actually be, it cannot be denied that each individual tries and intends to maximise their returns from the utilisation of their limited resources. Their rationality is subjective to their judgement. In addition to that, each consumer believes that their choice is the best alternative they could’ve gone for, in their own eyes. In simple words, I am rational in my eyes, and you are rational in yours.