Chapter 17, Problem 1RQ

To determine

To Explain: The three limits to rational decision making.

Explanation of Solution

.

Limits to rational decision making has been classified in three areas:

(1) Limited cognitive ability:

This limit is related to the complex decision or the decisions which requires some calculation. There are decisions which involves uncertainty, for example, the person may be able to work with probabilities and expected values, investment decision may require to understand the formulas of present discounted values. A person may make errors in doing complex calculations or avoid doing calculation or rely on some other person. So, a good calculating machine may perform the calculation quickly and make the right decision.

(2) Limited willpower:

This limit is important for making vigorous decisions , the decisions which requires some sort of timing element where the decisions taken may have long term implications. For example, A student may make plan to study for the upcoming test that how much he / she will study before one week of the test date. when the time comes for study, the lure for television , mobile phone or video games may be so strong that it may abandon the whole plan of study. A student may regret also for not being able to study. There are also many self control problems in many things like diet , smoking, drinking and so on. The model of self control problem where people weigh their well being more when they are actually living at that moment than the time they were planning ahead of it.

(3) Limited self-interest:

People may not just care about their own payoff , income or consumption, they may care about others also. his is not entirely foreign concept. For example , the sacrifices parent do for their children or other family members. There are more complex interpersonal values that would be difficult for standard model. People may not only care about the income , consumption that they and others end up with. They will get broader social goals directly as fairness and justice.