Bounded Rationality Framework
The limits of human decision-making
This framework explains how humans are limited in their ability to process information and make optimal decisions, due to cognitive constraints such as attention and memory.
- Humans are limited in their ability to process information.
- Cognitive constraints such as attention and memory impact decision-making.
- Humans use heuristics and mental shortcuts to make decisions.
- Recognize Cognitive LimitationsBe aware of the cognitive constraints that impact decision-making, such as attention and memory.Pro tipConsider the potential for cognitive biases and heuristics to impact decision-making.WarningBe cautious of the potential for cognitive limitations to lead to suboptimal decisions.
- Use Decision-Making StrategiesUse strategies such as decision trees or cost-benefit analysis to support decision-making.Pro tipConsider the potential for these strategies to help mitigate cognitive limitations.WarningBe aware of the potential for these strategies to be imperfect and require ongoing evaluation.
The South Seas Trading Market
Isaac Newton's investment in the South Seas Trading Market was driven in part by his failure to consider cognitive limitations, leading to significant losses.
OutcomeNewton's experience highlights the importance of considering cognitive limitations in decision-making.
Ignoring Cognitive Limitations
Failing to consider cognitive limitations can lead to suboptimal decisions.
The concept of bounded rationality was first introduced by Herbert Simon, who argued that humans are limited in their ability to process information and make optimal decisions.
Source · PODCAST
How to Make Better Decisions | Dr. Michael Platt