What concept refers to the limitations in human rationality in the context of decision-making?

The concept that refers to the limitations in human rationality in the context of decision-making is best captured by the notion of "limits of human rationality." This term encompasses a range of biases and cognitive limitations that can affect individuals' ability to process information and make decisions effectively.

In trading and investing, this idea becomes significant as market participants are often influenced by emotions, heuristic shortcuts, and social pressures, rather than purely rational analysis. For example, the limited ability to consider all information or the tendency to overvalue recent experiences can lead to systematic errors in judgment, such as overreaction or ignoring long-term trends.

Understanding these limitations helps traders and analysts to be more aware of their own biases and the behaviors of the market as a whole. Recognizing the impact of human behavior on market movements can be crucial for developing effective strategies and making informed decisions.

Other concepts, while relevant to decision-making and market behavior, do not directly define the limitations of rationality. For example, momentum persistence describes a phenomenon in financial markets where trends continue in the same direction for some time, but it doesn't address the cognitive biases behind decision-making. Positive feedback loops involve situations where an initial condition is reinforced, leading to an increasing effect, but again, this does not necessarily