Chapter Outline

Bounded rationality suggests that humans muddle through decisions using partial information, with limited perspective and with psychological biases that lead to satisficing rather than maximizing.
1. People organize spending into various mental accounts rather than treat money as fungible.
2. An asymmetric value function causes one to assess a gain as less helpful than the same loss would be harmful. This tendency applies to expected gains and losses as well.
3. Sunk costs are frequently considered when they should be ignored.
4. Cash costs are considered as more significant than implicit opportunity costs of the same size even though rational choice thinking would consider them the same.
There are ways that behaviour should be altered to capitalize on the bounded rationality way of thinking.
1. Gains should be segregated and losses combined.
2. Small losses should be offset by larger gains.
3. Small gains should be segregated from large losses.
4. Frame decisions under uncertainty in various ways to make sure that the real concern is being addressed.
Judgmental heuristics and biases condition behaviour in ways that rational choice theory would not predict.
1. People act on things they can recall best, which means events that occur often or more recently.
2. Representativeness or stereotyping leads to mistaken conclusions.
3. Regression to the mean suggests that outstanding or very poor behaviour is likely to be followed by more average behaviour.
4. The anchoring and adjustment perspective leads people to weigh initial data more heavily than subsequent information.
The psychophysics of perception causes people to consider gains and losses as per centages of the total rather than as absolute gains and losses.
When deciding is difficult, it is sometimes helpful to introduce an irrelevant alternative.

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