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.
Want to see more full solutions like this?
Chapter 17 Solutions
EBK INTERMEDIATE MICROECONOMICS AND ITS
- Describe three ways in which human decision making differ from the rational individual conventional economic thoeryarrow_forwardIdentify some essential elements common to any rational decision-making process?arrow_forwardDescribe 3 ways in which human decision differs from the rational individual conventional economic theory with explanations please.arrow_forward
- People interested in the study of bounded rationality study of how people ____ make decisions rather than how people ____ make decisions. 1. Should; actually 2. Don't; do 3. Actually; should 4. Do; don'tarrow_forwardHow is the Rational decision making a complex process?arrow_forwardSolve in 5 min good rating will be given Rajiv is training for a biathlon, a winter racing sport that combines cross-country skiing and rifle shooting. Consider the following scenario: Rajiv has only 15 hours available to devote to his training this week. Each hour he spends skiing is one hour that cannot be spent working onhis shooting. Which basic principle of individual choice do these statements best illustrate?arrow_forward
- Describe the procedure of considering economic decisions?arrow_forward3 ways by which human decision making differ from rational individual conventional economic theoryarrow_forwardDescribe 3 ways in which human decision making differs from the rational individual conventional economic theory.arrow_forward
- Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning
- Principles of MicroeconomicsEconomicsISBN:9781305156050Author:N. Gregory MankiwPublisher:Cengage Learning