Rational people?

What drives non-economist economists crazy is the economic premise that people are rational. People, in fact, are often driven more by emotion than by rationality. But this doesn’t make economic theory invalid, it merely means when applying it to the real world we have to adjust our expectations and sometimes account for irrational behavior.

If we didn’t use the premise that people are rational, then there wouldn’t be any economic theory at all.

There are, of course, a lot of intensely rational people in the marketplace. This explains the efficiency of financial markets. A lot of bright guys with pencil-necks and massive computers are calculating the values of stocks, bonds, currencies, and commodities to zillion digit accuracy. There are enough “rational players” in such markets that extreme–almost text book–efficiency is achieved.

In the world at large, however, we can’t afford to be too complacent about the rationality gig. This is particularly true when we’re up against groups and committees. Emotion, groupthink, and envy are far more likely to drive decision making in such contexts than cold and intellectual application of rational thought.

The Commonwealth sure doesn’t dodge the bullet on this count, I’m afraid, and I’ve seen some humdinger committee actions that I would have discounted as pure and twisted fiction if I had read about, instead of participated in, such affairs.

As they say, though, it’s a “learning experience.”

My strategy has always been to avoid irrational people. In my personal life, I simply weed them out. In my business life, I steer clear of them. I just don’t have the time, effort, energy, or even the plain inclination to deal with them. These are what author Robert Ringer labels as “drain people,” the types who wind up sapping your time and energy with dingbat behavior.

Of course, drawing a line between rationality and emotion can get murky. I once met a girl, Janet, who had moved to Florida after earning a degree in computer science.

Very bright girl, this Janet. Her goal: “To sit on the beach, drink margaritas, and listed to Jimmy Buffet.”

She took a job as a cocktail waitress, and just enjoyed living from day to day. No big ambitions. No real angst, either. No onerous commutes during rush hour. No incarceration in a cubicle. Not much income, on the other hand, and she pretty much lived hand-to-mouth.

Her family and college friends berated her for her irrational behavior and for “throwing away” her talents and education. As one of the brightest and best, she was supposed to be fast out of the chalks upon graduation, racing ahead in the dog-eat-dog corporate world. Instead, she ran full speed away from the career stadium, towards some faint and distant vision of lazy beaches and peaceful sunsets that only she could see.

Well–rational or irrational? I don’t know, but my guess is “rational.”

Most cases, however, are far more clean cut. Economics recognizes the innate human characteristic of having preferences. Understanding the trade-offs involved in indulging these preferences is what rational people do.

Irrational people, on the other hand, cannot account for the consequences of their actions as they indulge their preferences. They are human hand grenades ready to go off when the consequences arrive–and the consequences ALWAYS arrive. That’s not a comforting though, be it in personal affairs or in business deals. Better to avoid those gigs….

Better, perhaps, to go to the beach, spark up some steel drum tunes, and reflect that it’s often a crazy world out there.