Pi Attitude Zone: Flexibility

Rationalizing Our Lack Of Rationality

Homo Sapiens is supposedly defined by rationality. Economists believe we humans are logic-driven in our pursuit of self-interest.

Really? Maybe somewhere out there super-intelligent extra-terrestrials are monitoring our eBay bids and online purchases, checking the human race for signs of innate common sense. But they should not hold their breath; (or chlorine gas, or whatever it is that extra-terrestrials breathe). 

Faced with rational choices, the options we humans go for can be downright weird. At the supermarket checkout, a self-described thrifty, health-conscious shopper will pat herself on the back for choosing low-fat, no-added-sugar foods at bargain prices. Yet, as her right hand is handing over money-off coupons to the checkout girl, her left hand is impulsively scooping up a pricey gossip magazine and sugary candy bribes for her fractious kids.

Such self-contradiction may seem trivial and random, but in fact it is neither, according to Dan Ariely, MIT professor of behavioral economics, and author of “Predictably Irrational: The Hidden Forces that Shape Our Decisions”. The all-too-human habit of kidding ourselves results in “irrational behaviors (that) are neither random nor senseless …but systematic”, says Ariely. “We make the same mistakes over and over”.

Rationality says we should be minimizing personal debt, and saving for our retirement. So why do we borrow to the hilt and spend virtually all the money we can lay our hands on? In a recent year Americans had $10.184 trillion in disposable income. They spent $10.132 trillion of it. That’s 99.5%.  Americans, having reviewed their options, collectively resolved to spend virtually all the money they had; proof that people have trouble acting in their own self-interest.

Some theorize that this is because we are loss-averse, even when the ‘loss’ from our monthly pay-packet would be going into our own savings fund. But how does that explain people who fail to enroll in company retirement plans even when no employee contribution is required? 

All in all, it shows we humans are prone to endearingly muddled thinking. If asked by a clipboard-wielding canvasser to agree or disagree with the statement “Either something makes sense, or it doesn’t”, we seem disposed to reply “Uh… what was that middle one again?”

Zone: Flexibility Country: USA / North America Product – Financial