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

I passed by one of the Occupy sites in London the other day which appeared remarkably smaller than before Christmas. A lonely Christmas tree with a Santa attached to it stood outside one of the tents which all seemed empty. Having started as a protest against political climate in wake of the crisis in the US, it initially attracted a lot of participants and support. Something appears to have changed though. Local businesses are starting to suffer, residents are getting tired of the mess in their neighbourhood.  But so also do the political parties that were originally supportive are starting to become weary as became clear from a General Assembly at Occupy Amsterdam.

Having established that at the General Assembly it is customary that whenever someone says something it is repeated by everyone else, the Mayor of Amsterdam (in case you wonder, he is left wing) decided to use it to his own advantage.  It only took a split second to come up with “tomorrow, we will all bugger off and find a job”. Few of the crowd repeated “tomorrow” before it sank in. After that, complete silence.

The underlying ideas are still going strong, but perhaps it is time for a rethink on execution strategy.

Dr Natalie Schoon, CFA