So, what if I’m irrational?

This post of mine starts with a simple question: Are you irrational?

What is your take on it? You think you’re rational. Or, you’re not sure of being either. And why so?

Well, for those who feel unsure about the term ‘irrationality’, let me suggest some explanation. Wikipedia describes irrationality as “an action or opinion given through inadequate reasoning, emotional distress, or cognitive deficiency”. It is understood that economic definition of rationality and irrationality will vary according to the context it is used in. But, in general, irrationality refers to the state of being irrational – the opposite of being rational – when people lack the power of understanding, either full or in part, and fail to decide according to ‘the economic theory of utility maximization’.

Research on the issue of irrationality observes that people tend to be continuously irrational, at the same time claim to be perfectly rational. Strange!! No? I’ll further take up some contextual examples wherein people intentionally behave in irrational manner, but argue (with others or with themselves) that their actions are rational, also otherwise.

First example which I pick to quote here is related to a very much trending issue: Team Anna Hazare and its anti-corruption movement. This anti-graft crusader led by Sri Anna Hazare has gathered enormous supports from the masses; of course, it has attracted critics also, but very less when compared. People are coming from almost every nook and corner to their nearest protest points to extend their support to the movement. There are two issues which explain their behavior at this moment. First, their actual belief differs from what they perceive to believe, known as delusions. They do know that any severe issue such as corruption is not going to vanish or even controlled just by passing of the Jan Lokpal Bill or whatever; still they are herding in one sense or the other; most of them are doing what their neighbor is doing. And you remember my last post where I tried to explain how our neighbor’s actions affect our own behavior and actions also. Don’t feel like I am against extending support to the cause, on the contrary, I am a strong supporter to the movement. I am just explaining the behavior of majority of them, including that of mine! My question is: Do you feel you won’t give away bribe for a small service such as getting a berth in railways and go on to make a complaint to the Lokpal or any such agent? In this context, I believe that making paying bribery legal as suggested by the chief economic advisor Kaushik Basu in his working paper for Ministry of Finance (Govt. of India) and supported by NR Narayana Murthy, seem more rational. Yet, these irrational behaviors are justified to great extent, aren’t they?

Another example is concerned with my core area of interest, finance, economics and investments. Human behavior works within a mechanism that has evolved to give optimal behavior in normal conditions leading to irrational behavior in abnormal conditions. Once in situations outside one’s comfort zone (this may again vary depending on one’s life cycle, demography, and other host of factors), people often experience intense level of odd behavior – either fear or greed – and tend to regress to a fight-or-flight-response mentality. You may encounter a number of individuals who show this type of behavior in stock market. Investors get panic on (sometimes entirely) irrelevant piece of information and commit financially fatal mistakes. Their irrational response to such situations is reflected in their trading decisions, which subsequently boomerangs and this process continues to create some sort of market bubbles. Ultimately, investors end up losing their fortunes. This may be called the negative side of irrationality. Now, let’s look into the positive sides of irrationality, if any. For instance, you along with your friend go out for a lunch at some place where we are most unlikely to visit again. You notice that your friend leaves the waiter a tip. You might be thinking, “How irrational! He is not going to see the waiter and the restaurant again, so why leave him a tip?” So, is it really irrational to tip? Even if, it is, it is good to do that – both economically and socially! Similarly, in stock markets, going against the prevailing trends might seem irrational at that moment, but afterwards, it may take either course: favourable or unfavorable. If favourable, you would pat yourself that you’re wiser than others and earn yourself a good reward for that. If your odd decision goes wrong, you are most likely to say that you might be suffering from behavioral biases leading to a wrong decision and a subsequent loss. Your one time rational behavior (as it was perceived then) becomes entirely irrational after the outcome changes.

Being irrational sometimes lead to favourable outcomes and vice versa. For me, therefore, a person is rational if he exhibits a goal-directed behavior and tries to achieve this goal in the best possible way, given his constraints. “Goal” and “best possible way” are, of course, specific to the context. Often, our inability to comprehend the consequences of our own actions, possibly due in part to lack of understanding exactly the goal we’ve set. This leads to our judgment whether our actions are irrational or otherwise.