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Bounded Rationality: Why Customer Behavior Is Tough to Predict

Bounded Rationality: Why Customer Behavior Is Tough to Predict
Written by Elizabeth Chey

For decades, economists have tried to understand how people make decisions. In studying some behaviors, economists in the 1960s offered a neoclassical economics theory called the Rationality Assumption, which has five main aspects:

  • People decide rationally and optimally by processing all information fully, objectively and without costs.
  • People can’t be manipulated by how information is framed, e.g., being influenced by the phrase: “30% off” vs. “pay only 70% of the original price.”
  • People’s preferences are clear and obey rules of logic. If given a choice between an apple or an orange, this person can easily pick what he/she/they likes better.
  • Rational people think through their decisions over the long arc of their lifetimes.
  • Rational people tend to stick with decisions they make within a timeframe: e.g. “I’ll buy that car within the three months in which I will set aside a down payment.”

This rationality assumption sounds very logical and even pragmatic. Yet as marketers, we are left wondering: If consumers were rational, then wouldn’t we be able to predict their behaviors based on logic?

We see consumer decision-making riddled with confusion, indecision and impulse buys. This blog series aims to dive into the findings of different cognitive biases, so you as marketing and content creators can create nuanced marketing materials, based on evidence-based consumer psychology.

A new way to look at consumer decision-making is to understand it as Bounded Rationality, a topic to be explored in this blog post.

Consumer decision-making is riddled with confusion, indecision, and impulse buys, but that’s where #boundedrationality comes in. Learn more about this cognitive bias and how it affects your marketing. Click To Tweet

What is bounded rationality?

What is Bounded Rationality?

Sometimes, if you go to a fancy restaurant, you want the best dish, the signature dish. Other times, an OK pizza will do, because you want something quick.

Bounded Rationality is the idea that when we aren’t optimizing, we seek a decision that is good enough to save us time and energy. It assumes there’s a scale of consumer types: on the one end are the “maximizers” who are constantly jostling to get the crème de la crème in every decision they make. On the other end of the spectrum, are the “satisficers,” those who are OK with making a decision on something that is: good enough.

Bounded Rationality teases out the inconsistencies of consumer behaviors unaccounted for by the neoclassical rationality assumption. It asserts that though most decisions appear to be rational, people are far more complex and cannot be boxed into logical frameworks. Our decisions are bounded by an array of cascading considerations, such as:

  • The information we have is either incomplete or imperfect. Read about a related cognitive bias I wrote about called the Ambiguity Effect.
  • We face time constraints.
  • We are overwhelmed by the fear of making a bad decision; uncertainty further clouds our ability to choose.
  • We haven’t set clear criteria on how to make a decision.
  • If we have set some criteria, we don’t give each of the criteria equal weight.
  • We have a limited list of alternatives.
  • We don’t have time to evaluate all the alternatives.
  • At some point, we say: “I can’t know everything: This is good enough for now. Looking and researching any longer is going to cost me precious time, and time is money!”

I would wager a bet that if you have tried to decide on a movie to watch on Netflix, Hulu, Amazon Prime, Disney Plus, or HBO on a Friday night with your partner, you’ve tested Bounded Rationality decision-making to some extent.

For the love of bacon: Bounded Rationality in common life

Like everyone else in England and America, most of us have grown up eating bacon, sliced ham, and other sandwich meats for nearly our whole life. Our love for bacon is so severe, we’ve put it on desserts, like maple donuts. Yet for decades, research has shown the use of “nitrates” to “cure” bacon has equal amounts of carcinogens as cigarettes.

Under Rational Assumption, we’d have read all information about the meat processing of bacon, and be able to logically see that if bacon causes cancer, and we cared about our health over the arc of our lifetime, we’d stop eating bacon. “Nitrate-free” labels might attract us to buy bacon, but if we read the label and see that the “preserving” process used celery powder, then we’d catch that as a substitute for nitrate that had the same carcinogenic effect and not buy it.

But our behaviors seem to throw all rationality out the window. Most of the time logic or facts do not inform our decision-making. Instead, the taste of crispy, greasy bacon overcomes our senses. Sensorially overcome, the smoky burnt bit that is likely going to cause cancer, overrides rationality.

Instead, we say to ourselves: “What’s a little bacon going to do, kill me?” And in your head echoes the Adam Ant song “Goody Two Shoes.” “Don’t drink, don’t smoke, what do you do?” We buy the bacon, and revel in our not so goody-goody sin.

How Bounded Rationality nudges augmented decision-making.

How Bounded Rationality nudges augmented decision-making

Given the vast amounts of information about everything these days, consumers can’t possibly keep up. We have turned to Google searches to help us, sift through and create a hierarchy of information for us, for nearly everything we do.

When you enter into Google: “Mediterranean restaurant near me” you have activated a form of augmented decision making aimed at helping you overcome Bounded Rationality. Instead of scouring through a phone book with hundreds and thousands of listings of local restaurants, Google curates for you a short list of its top 10, fully equipped with a set of criteria: how far it is from where you are; how expensive it might be; how many other people have liked or disliked it, and even some pictures to whet your appetite.

Bounded Rationality has nudged us towards algorithm-driven, augmented decision-making. Some may fear that artificial intelligence will replace humans, but that’s not really where we are right now. We have to realize that we live in a Big Data world, where enormous amounts of data about us is being collected. What sites we visit before we go to bed at night? Where we bank? What we buy and where we eat at any given time can be traced back to our phones.

Yet, we have also been able to make more informed decisions and saved ourselves significant amounts of time because we are not shifting through information or going from store to store to find that one paper cutter tool for our scrapbook making.

Instead, we plug in what we are looking for online and within seconds, the search engines have pinpointed where the product is in stock. These are all forms of augmented decision-making, with a heavy assist from Google, Amazon, and every search engine linked to company websites like Target.

How Bounded Rationality helps consumers decide

In the marketing world, we see how augmented reality will help customers experience the products and services that they can test virtually before buying. Yet, in addition to experiencing a product, we are increasingly reliant on algorithmic decision-making, essentially, where automated analytics help at better informing consumers, in the hopes of making better data-driven decisions.

What the future holds is how technology will push us to overcome our Bounded Rationality. Will algorithms ultimately make decisions for us or merely assist us better in making big decisions? Jason Burton, author of “Algorithms for Simpler Decision-Making: The Case for Cognitive Prosthetics” writes: “Like a prosthetic leg might allow an impaired individual to comfortably move through the physical environment, behavioral scientists must now come together to design cognitive prosthetics — algorithmic extensions of the human mind that allow individuals to navigate the boundless digital environment, enabling data-driven decision-making without forfeiting human autonomy.”

To get a leg up, I’d encourage marketers to figure out how to influence the design of those cognitive prosthetics.

About the author

Elizabeth Chey

Elizabeth Chey consults international, community-based, and small nonprofits on communications, advocacy, strategic planning and capacity building. Her passion for arts, peace building and development compels her to tell complex, intimate stories about people working for social justice. She earned her MFA from New York University and a Journalism degree from Northwestern.

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