Within limits

Rethinking the tenets of economic orthodoxy could help improve customer choices.

Do you know what you want in life? Chances are that you’ve got no idea. Even if you do, it’s likely that you don’t consistently make decisions that get you closer to your goal. 

This is not because you are especially flawed, say Sanjit Dhami and Cass Sunstein, but because humanity is cursed with limitations on our ability to be rational. Yet economic orthodoxy asserts that the individual is best placed to decide what is best for them.

Bounded Rationality challenges that orthodoxy. It is a forensic dissection, beginning with the theoretical underpinnings of classical economics: the Bayesian Rationality Approach. It states that humans have “complete preferences” that don’t change, and that we possess infinite computational power and memory, as well as access to all information that exists about a given decision. This is plainly fanciful, but the authors don’t just dismiss it out of hand: they challenge it empirically, with comprehensive analysis and (sometimes painfully dry) proofs.

Dhami and Sunstein show that our ability to make the right decision is impacted by our emotions, how a question is framed, and whether it affects us now or in the future. We are biased in all sorts of ways – and even if we weren’t, we often lack key information. They conclude by proposing a form of libertarian paternalism that recognizes we could all benefit from nudges, better information and reality checks to make better – or at least better-informed – decisions.

Product and strategy leaders in particular will find Bounded Rationality a worthwhile, albeit taxing, read. The book challenges accepted truths about human decision-making, and provides a useful framework for treading the line between coddling and enabling customers to make decisions that better align to their goals. 

Tom Sykes is a senior strategy professional and non-executive director.