INSIDE-OUT ECONOMICS · INVESTIGATING BOUNDED RATIONALITY

Do optimisers always win?

1 / 5 · Create

01 — Create your classroom market

Enter the votes. Each investor starts with £10,000. Nobody is in the market until you add them.

Optimise

Spend 20 hours researching an investment independently.

Satisfice

Spend 30 minutes choosing a good-enough diversified investment.

Imitate

Spend 5 minutes following apparently successful investors.

Investors0
Starting capital£0
Most common strategyNone
🔵 Optimise 0%🟢 Satisfice 0%🟠 Imitate 0%
Opening prediction: Optimisers win.

In the deliberately favourable benchmark, independent research finds valuable information before others do. But what happens when investors have limited time, useful shortcuts and competitors who respond to their decisions?

02 — Why your investor mix matters

The vote changes more than total wealth. The strategies interact — sometimes helping, sometimes harming one another.

Optimisers

INFORMATION PRODUCERS

What they do

Independent research may uncover mispriced investments and improve price discovery.

What changes when there are more?

Research findings can become reflected in prices, reducing the advantage of finding them first.

Important limitation

More research does not guarantee accuracy or higher returns after costs.

Satisficers

RULE-BASED INVESTORS

What they do

Use a relatively quick diversified strategy instead of searching for the single best asset.

What changes when there are more?

More of the class's wealth is spread across investments rather than committed to one popular trade.

Important limitation

Diversification reduces asset-specific risk, not losses from a market-wide crash.

Imitators

SOCIAL SIGNAL FOLLOWERS

What they do

Follow apparent winners. This can spread information — or spread mistakes.

What changes when there are more?

If they copy the same trade, correlated demand can amplify momentum and reversals.

Important limitation

Copying only creates crowding when investors converge on similar positions.

Your market: 0 investors
The model uses investor shares to represent research spillovers and imitation-related crowding. These are teaching assumptions, not universal market laws.

03 — Seven conditions that can protect imperfect decisions

Not seven guarantees of profit. Seven reasons costly, incomplete decision-making need not be financially disastrous.

01 · TIME

Speed

Can acting quickly beat analysing longer?

Research has a cost in time. A timely good-enough decision can beat a superior choice made after the opportunity disappears.

02 · DECISION DESIGN

Rules

Can simple safeguards limit losses?

Diversification avoids depending on one asset. It reduces some risks without needing a perfect forecast.

03 · ADAPTATION

Learning

Can investors improve without optimising?

Feedback helps investors revise practical rules. Learning is imperfect and may be misleading when markets change.

04 · INFORMATION

Competition

Does extra research keep paying?

When many traders discover the same opportunity, buying pushes its price up. The private reward to research can shrink.

05 · PRICE CORRECTION

Arbitrage

Can someone else's research help me?

If an asset is underpriced, informed traders may buy it; their demand pushes its price towards fair value. Passive investors can then trade at less distorted prices. Arbitrage is risky and limited.

06 · COLLECTIVE ERRORS

Averaging

Do mistakes offset or reinforce?

Independent errors may cancel across investors. If everyone copies the same signal, errors become correlated instead.

07 · MARKET DESIGN

Institutions

Can rules reduce the damage?

Disclosure, oversight and trading safeguards can limit some fraud, misinformation and panic-related harm — not eliminate market risk.

THE ECONOMIC TEST

Survival ≠ victory

Does a shortcut have to win?

No. It may persist because its net performance is acceptable relative to the time, cost and uncertainty of more research.

Read this as a reference: the next screen tests how changing these conditions can overturn the Optimiser-winning benchmark.

04 — Put the prediction on trial

Choose an event. The seven conditions change together; then move one slider to isolate a mechanism.

Seven market conditions (0 low → 10 high)

What changed?

What happens to each £10,000?


05 — Verdict: why bounded rationality survives

The prediction was conditional. The investigation shows exactly what it depended on.

MYTH · PARTLY SURVIVES

More thinking can improve a decision.
It does not always improve the payoff.

Optimisers win when the extra value of their information exceeds the costs of acquiring and acting on it. But investors also face limited time, costly information, uncertainty and competition for the same opportunities.

WHAT SURVIVES

Research can earn a premium.

Superior analysis can identify mispriced investments before others do — when that advantage is real, usable and worth its cost.

WHAT FAILS

More research always wins.

Delays, research costs and changing prices can erase the advantage. A simpler strategy can earn a higher net return.

WHAT EXPLAINS MORE

Shortcuts can be sustainable.

Rules, learning and market corrections can limit the cost of imperfect decisions. They reduce some mistakes, not all risks.

THE ECONOMIC VERDICT Bounded rationality can be a sensible response to real constraints, not merely a failure to think hard enough. Our classroom model demonstrates the possibility; it does not prove how widespread it is.