bounded rationality – PurpleSage41

As an economist, I am baffled about the discrepancy between how economists think our brains work and how other behavioral scientists, especially psychologists, offer a different view. Economists think we are very good calculators of costs and benefits and make the best possible choices. They also assume that we make our decisions based on our understanding of what is in our best interests. I will just look at the first of these two assumptions today, saving the second one (do we really care about anybody else?) for another blog.

Sorry , folks, while we are flattered by all this admiration from economists for our reasoning and decision-making competence, it isn’t borne out by empirical research. Our time horizons are short. (That’s called over-discounting the future, or inability to defer gratification.) We also get confused by too many choices and make better decisions in our own self-interest when we are offered fewer choices. (That’s called bounded rationality, as opposed to President George Bush’s excess of choices in his prescription drug program.) We do care about others, not just ourselves, and for future as well as current generations. (That’s altruism, as opposed to pure self-interest).

The psychological defect I particularly want to focus on today is our tendency to accept information that confirms what we already believe to be true and reject any news that contradicts our intuition, our gut, our vision of how things ought to be rather than how they really are. And with the help of social media, we are seeing drastic and often harmful effects of confirmation bias in our choices of all kinds.

There are three predominant sources of confirmation bias in contemporary American culture. Two are old, one is relatively new. One is a herd mentality, driven by the desire to belong. A second, related source is social segregation, taking refuge in silos of like-minded people. The third, aided and abetted by the skills of artificial intelligence in recreating “reality.y.”

Was January 6, 2021, an insurrection or a slightly overheated tourist event? Was the economy better under Trump or under Biden? Is selling your insurance policy to support current consumption in retirement really such a good idea? Is climate change a hoax? Is Social Security going to end in 2034? Is the opposite of being woke being asleep? Differing answers to these questions are supported multiple “alternative facts” that feed off confirmation bias.

There are no simple answers to these flaws in the workings of our otherwise amazing brains. It’s probably a good idea to step out of your silo every now and then and give your brain a chance to regroup.. MSNBC-ers, watch Fox now and then, and vice versa. Talk to your neighbors whose world view is different from yours and try to understand why as well as seeking common ground. Support balanced media where you can find them.

Becoming more of our own cognitive limitations is a good place to start. If we can’t be honest with ourselves, how can we be honest with each other? Asking ourselves, for example, why we should doubt the reality of climate change should consider the self-interest of fossil fuel companies and other sources of harmful changes in the atmosphere. Climate change also caters to our short time horizons and procrastination when the benefits are long-term and the costs are immediate. Exploring, alone and with others, the underlying questions of who reaps the benefits and who bears the costs of any particular policy choice should take you a long way toward deciding what you believe to be true, and why.

I’m a fan of the various versions of the TV reality show House Hunters. No, I’m not looking, and no, I’m not into granite countertop and hardwood floors (okay, I have both) or other modern must-haves like farm sinks and stainless steel appliances (where would I put all my souvenir refrigerator magnets?). I like the show because it illustrates the process of choice, and I’m an economist, so making good choices is what my vocation all about.

I’m sure they probably consider more than three houses, but the format of the show is that they bring it down to the final three. And for each one, the choice comes down to no more than three attributes. Price and location dominate. Layout. Enough bedrooms. Entertaining space. Yard size. Typically, it will be price and location and some third quality that might vary from house to house (#1 has a pool, #2 has a big yard, # 3 has enough bedrooms…). It is an exercise in what economist Herbert Simon called bounded rationality. Too many houses, too many attributes, and they will spend another year or two in the crowded apartment. Always, at the end of the show we revisit the house hunters in their new digs six weeks or six months later and they are satisfied with their choice. You have to wonder if they ever aired a show that ended up in buyers’ remorse.

It’s a useful exercise that any of us could replicate in buying a car, changing jobs, having a baby, getting married (not necessarily in that order), moving to a different town. We start with a long list of attributes. One way is to make it a binary choice—change, move, quit, marry) or stay with the status quo? Once we have opted for change, we are a branch down the decision tree. What do we want in the new situation? Which attributes matter more? Be near the city for her, or the job for him (or vice versa)? More indoor space or more outdoor space? Move-in ready or fixer upper?

If you have big decisions coming up, and especially if there is a partner involved with a different list of attributes, , I suggest a few episodes of House Hunters.. It can help you think through your decision-making process and wind up with a more satisfying outcome,

Tag: bounded rationality

House Hunters and the Way we Choose