Although we like to think of ourselves as fully rational when it comes to decision making, the truth of the matter is that we are not. Our ability to make decisions is bounded by the limitations of what our brain is capable of processing at the same time. Simon (1957) introduced the notion of bounded rationality, recognising that decisions are not based on fact alone, but influenced by other elements. Our minds do, after all, not have the capacity to understand everything. Particularly not when complexity increases. As a result, decisions are not fully thought out, but are arrived a within the limitations of our brain.
Besides the limitations on the amount of information that can be processed, our brain also plays tricks on us. Negative information such as, for example, a recent investment loss, has a more pronounced impact on our behaviour than a recent gain. Equally, when we pay for something by credit card we experience the joy of the purchase without the pain of parting with our money.
Dr Natalie Schoon, CFA
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