Emergence of Simplicity amidst Complexity - Essay Example

OBSERVATION REVIEW ON BUYING A HOUSE By Location Observation Review on Buying a House Summary of the Observation A woman needed to buy her first house as she was desperately in need of a home at a reasonable price that matched her financial status. She sought the help of a real estate agent in the identification of a potential house she could buy. The woman assumed that all the real estate agents were competent, and that their services met the expected standards. However, the agent, whom she relied on proved to be pushy. Most of the houses that were identified in the initial phase of the search were pretty much above her budget. Moreover, houses that were in the woman’s budget needed a lot of fixing after buying. The woman viewed several homes for sale and opted to buy a two bedroom red-brick Cape Code (Barros 2010, p. 457). Notably, this house was the cheapest in the suburbs with many others in the neighborhood costing double the price she bought. After purchasing the house, she began fixing it so that she could move in. She successfully fixed all the rooms and bought new furniture. Worth mentioning is the fact that the house needed a lot of cleaning up because it had been neglected for 47 years by its previous owner. After settling down in the new home the woman purchased, she had the worst experience a few months later. A hurricane that caused flooding and her house was filled with water (Brennan & Lo 2012, p. 3). Many of her belongings and furniture and other electrical appliances were destroyed during the hurricane. After the flood, it took an entire year to renovate the house and restore its original condition before the flood. Numerous procedures with different governmental agencies as well as insurance companies served to make the experience stressful. Analysis of the Decision The decision-making exhibited by the woman buying the house was an evident example of bounded rationality. The theory of bounded rationality was developed by Simon in 1957 who opined that it was impossible to abide by the normative models of decision making because human beings did not have the required capacity to do so. Therefore, when many people are compelled to make decisions, they do not take time to consider the best possible option (Golman 2012, p. 7). Many of the people end up making irrational decisions in a hasty manner. They fail to analyze the potential consequences associated with their decisions, a common factor that defines bounded rationality. In the case of the woman, she exhibited bounded rationality when buying the house. She exhibited three aspects that have been defined as the key unavoidable constraints experienced by many people when making decisions. She lacked adequate information concerning housing and how deals of buying houses were contracted. The information she had was too limited for her to consider any alternatives (Harstad & Selten 2013, p. 503). Notably, the only thing the woman wanted was a house at a reasonable price. She did not give the agent any further details of the house she wanted. She knew that she wanted a house in a specific location, but did not have any information concerning any environmental risk factors evident in that region. Evidently, the woman lacked any knowledge concerning contractual terms of buying houses in that region. She did not conduct any prior research that would have presented her with relevant information to enable her choose a good house (Laville 2000, p. 400). When Simon developed the concept of bounded rationality, he defined the lack of adequate information during decision making as a leading bound. In addition, the woman faced a second constraint, which is commonly faced by other human beings hindering rational decision-making. She failed to utilize her rational capacity in an effort to weigh out the best house she would buy. She relied on the compelling real estate agent who convinced her to buy the house because it was the cheapest. She did not think of quality, but focused on the cost of the home (Lee 2011, p. 515). Moreover, she did not have a personal initiative of defining a home that would be safe for her. Therefore, she failed to use rationality when hiring a real estate agent. A rational decision in this case would have involved a rigorous research of reputable real estate companies that offered compensation if the deal went wrong. She applied selective perception, which often leads to bounded rationality. Although there were many real estate agents with different values, she chose to believe that all of them were competent. Moreover, she accepted to buy the house by offering a price with an escalation clause (Marwala 2013, n.p). She did not seek to find out the potential disadvantages of such a contract. She blindly heeded the advice of the real estate agent without any questioning. Even after realizing that other houses in the neighborhood cost twice as much, she did not consider the difference critically. Therefore, she ended up buying a house situated in an area prone to flooding and that needed a lot of fixing before she could settle down (Salehnejad 2007, p. 60). The third constraint was that she was rushing against time. She was buying the house during a time when the real estate industry registered higher prices. After identifying the house, she decided to close the deal immediately. The limited time prevented her from carrying out research of different regions and identifying potential risks of different houses. After searching for several months, she felt that it was taking too long to own a home. This explains why she settled for the cheap house without second thoughts. Only a year down the line did she realize that she should have taken more time and relied on advice from experts in the purchase of a home (Schilirò 2012, p. 107). The three constraints discussed herein led her to make satisficing decisions. On the other hand, rational decision-making seeks to identify the optimal conditions, which present the maximum benefits and minimal risks. However, the three constraints serve to bound rationality, making it impossible for an individual to analyze situations fully, identify alternatives, and eventually settle for the best alternative. Many economic agents who do not understand the value of optimization exhibit bounded rationality. They are usually unable to identify the expected utility of different alternatives. The complexity of situations compels them to rely on the easiest option without much analysis. The woman described in this case was unable to achieve optimization because she relied on bounded rationality (Spiegler 2011, p. 90). Reflection If I were the woman described above, intending to buy a house, I would have made an entirely different decision. Since the theory of bounded rationality highlights the common constraints that limit rational decision making in human beings, I would be keen to avoid the three constraints. Prior to beginning the process of buying the house, I would gather information concerning different aspects of the real estate industry. I would carry out an online research and then a physical research in an effort to identify the best location of buying a home (Tiwana et al 2007, p. 164). I would identify the qualities that define my intended home. Moreover, I would gain knowledge concerning the market prices of houses in different regions and be able to project my budget in a realistic manner. I would also seek the advice of my friends and consultants, who have advanced knowledge in the process of buying houses. I would identify a real estate agent from a recognized company. The most critical criteria of identifying the agent would be ensuring that he or she has a vast understanding of the industry, and abides by professional conduct. Unlike the woman described above, I would ensure that the agent is reliable and does not pressure me to buy any house that does not meet my definitions (Todd & Gigerenzer 2003, p. 148). The main factors that would affect my decision in the process of buying the house would be the price, the general quality of the house, the location, and history of the house. These are critical factors, which need to be considered in a balanced manner, something that the woman did not consider. In addition, I would ensure that I carry out extensive research of the potential environmental risks of the neighborhood of any house I identify. This would enable me to calculate the cost of maintenance and any utilities involved. This would eliminate the emergence of hidden utilities such as cleaning up after a flood, which surprised the woman in this case (Brennan & Lo 2012, p. 4). After the successful identification of a house that meets my requirements, I would prefer to settle for a contract whose terms cover all the issues of my concern. The contract should be fair, and I would never settle for any type of an agreement that I do not understand its operations. In all the processes of buying the house, I would focus on using my rationality capacity in analyzing the situation. Focusing on the use of my rationality capacity would help me evaluate the offer of each house identified and be able to compare different houses according to the utilities involved. Finally, I would take my time in the process of buying a house. Having limited time for decision-making has been identified as one of the constraints exhibited in bounded rationality (Marwala 2013, n.p). To avoid this bound, I would take my time with all the processes of searching for a potential home and finally buying it. Taking time can serve to ensure that I do not make hasty decisions and settle for a home that does not meet my requirements. Bibliography Barros, G 2010, Herbert A. Simon and the concept of rationality: Boundaries and procedures, Brazilian Journal of Political Economy / Revista De EconomiaPolítica, 30, 3, pp. 455-472, Academic Search Complete, EBSCOhost, viewed 30 September 2014. Brennan, T, & Lo, A 2012, An Evolutionary Model of Bounded Rationality and Intelligence, PlosONE, 7, 11, pp. 1-8, Academic Search Complete, EBSCOhost, viewed 30 September 2014. Golman, R 2012, Homogeneity bias in models of discrete choice with bounded rationality, Journal of Economic Behavior& Organization, 82, 1, pp. 1-11, Business Source Complete, EBSCOhost, viewed 30 September 2014. 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