Poor Homo Economicus
Are people rational, or irrational? It depends. It certainly depends on exactly what you mean by ‘rational’ or ‘irrational’. You may very well on occasion have judged someone’s choices or behaviour as irrational (maybe even your own!), without referring to a clear, agreed definition. But I suspect it is not a question that exercises you hugely. Sometimes people act rationally, and sometimes they don’t.
But in the weird world that joins economics and finance with the behavioural sciences (like psychology, sociology, and anthropology and so on), human rationality is rather a bigger thing — controversial, even. Some of this world’s denizens are much more categorical in their judgement, and claim (or claim that the other side claims) that people are either wholly rational, or wholly irrational. Behavioural economist Dan Ariely’s first two books were called Predictably Irrational, and The Upside of Irrationality; his fourth one Irrationally Yours — that leaves little to the imagination.
An inaccurate model
Behavioural economics emerged as a reaction to the standard model of human behaviour in classical economics: Homo Economicus. This character is rational, narrowly self-interested, and seeks to maximize his (let’s just assume he’s male, yes?) utility. His second and third traits are neither ambiguous nor complicated. He looks after number one, and he doesn’t settle for second best — only the very best is good enough. That first trait, though, is trickier: does it refer to the mechanism by which he makes decisions — correct, logical reasoning? This implies that he does so consciously and deliberately, based on facts — and so not unconsciously, impulsively, or based on conjecture and, heaven forfend, emotions. Or does it refer to the outcome -acting in order to achieve a particular purpose or result, regardless of how that is done?
It is not hard to see why the idea of Homo Economicus is being challenged as an inaccurate model. Real people are nothing like this guy. We humans are…