Have you ever wondered why we humans so often choose to make irrational financial decisions that demonstrate our preference for expediency and good enough over excellence and perfection especially since it is so critical to our future economic well-being. In other words, why do we accept mediocrity so often?
You see, Bounded Rationality is a groundbreaking concept introduced by Nobel laureate Herbert Simon. It challenges the long-held belief in traditional economic theory that individuals always make perfectly rational decisions. Let me say that again so it sticks in your mind: Mr. Simon basically debunked the long-standing notion that humans (meaning you and I) make “perfect rational” economic decisions. He argued that despite striving for rationality, we are constrained by various factors that limit our decision-making abilities. You may, for example, make less than the best decision because the situation you are dealing with is simply too complex. That seems like a silly statement because we all know we know everything about everything all the time. Right? The harsh reality is you have limited knowledge about most subjects and yet you must decide on those therefore your ability to think, reason, and understand is hampered. Unless you are an expert in all subjects. To me personally, that is a humbling realization. Is it possible that only the truly honest with a high degree of personal integrity are genuinely able to appreciate and therefore practice intellectual humility? Just asking.
Additionally, in many cases you just do not have the time to make an informed decision. You have groceries to do, run to the gym, take the kids to recital, do the laundry, prepare the family meal, deal with in-laws, mow the lawn, meet friends for quick game of whatever, clean the house, wash the car, take the garbage out and so on. Finding the time to dedicate to boring subjects such as long-term financial planning requires breaking the barriers of bounded rationality. Doesn’t this sound like the familiar intoxicating nectar of procrastination?
When it comes to finance and economics and healthy nutrition choices unless you are an expert in these subjects you may not have access to all relevant information. Nor can you process all the available information even if you did. As a result, you may opt for simplifications and mental shortcuts (technically known as heuristics) to make critical decisions. Remember the days when people simply decided to accept whatever the doctor recommended only because the topic was too complex? Obviously, all doctors know everything about everything in their respective fields. Right?
You and I suffer from cognitive constraints such as constrained attention, constrained memory, constrained knowledge, constrained time etc. So, we make do. These limitations can affect our ability to process information and make excellent decisions. OK in the realm of everyday minor decisions. Not so OK in critical areas affecting our future well-being such as health and wealth.
Rather than maximizing our personal satisfaction as decision-makers we often settle for a "good enough" solution that meets our minimum criteria or satisfies our needs, even if it is not the optimal solution. As decision-makers we will often use rules of thumb or mental shortcuts to simplify complex decision-making tasks. While these traits can be efficient, they can also lead to serious errors in judgment. Most definitely not the optimal strategy in all cases. The spread of mediocrity in our everyday quality of life becomes the norm. Are you prepared to accept good enough in all aspects of your life, all your life? Worth contemplating don’t you think? Have you ever considered the notion that the achievement of perfection may not be mandatory but the pursuit of it is? After all, who wishes to dedicate their entire life in the pursuit of the bronze medal?
Think about it!