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

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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 rationality in 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 computing how much you should spend on gadgets in order to make the necessary monthly investment in your retirement fund that will give you the lifestyle you want in your 60s. Besides, you realize that you have reached your maximum gizmo expenses for the month. But wait! That gadget is now on sale! “Buy me! Buy me now!” sounds a lot louder this time. So, even after you’ve painstakingly hurdled limitation no. 1 (bounded rationality), your downfall may be bounded willpower, as you may not be able to resist the temptation of buying the device that is now on sale. 

3. Bounded self-interest – While humans may be perceived to always put the self first before others, the reality is that we care and/or we want to be perceived as caring individuals. There is a willingness to sacrifice self-interest for the sake of others. 

Let’s use the gadget story again. Suppose your son really wants this expensive electronic toy for his birthday, a kid version of the gadget you wanted to buy. You know that it’s crazy to spend this much for a kid’s toy but your being pusong-mamon (soft-hearted) gets the better of you that you end up buying it by cutting back on some of your personal expenses. You choose your son’s happiness over your self- interest. 

Bounded self-interest may be good for harmonious co-existence and for humanity in general, but there’s also a downside to it. As in anything done in excess, this may also cause trouble. 

In the Filipino setting, the trouble is usually in the form of over-giving parents who fail to save and invest for their retirement because of too much concern for their children’s welfare. Our OFWs (Overseas Filipino Workers) are also prone to suffer from this third boundedness, sending everything to their family, extended families, and sometimes mini barangays at the expense of their own future.