Rationality
When talking about economics or investing, we can assume that people are mostly rational, in the sense that:
- For two different investments with the same return, investors prefer the less risky
- For two different investments with the same risk, investors prefer the more profitable one
This should always be the case, right?
Well, not really.
Between FOMO and FUD, emotions play a Really Big part in our decision-making process, not to talk about pure speculation and good old laziness.
Limited Rationality
A more realistic approach is limited rationality, where we factor in the limited time, energy, and intelligence of humans.
This allows us to explore how common non-rational decisions affect both our investments and the wider economy.
Lack of Information
The biggest cause for irrational decisions is a lack of information.
In the age of the internet, if you really wanted to, you get as close to the truth about any topic as you want, the only upper limit being the collective knowledge of the human species.
Namely, for any investment, you could spend years doing research about a particular company or crypto.
Emotion
Going back to FOMO and FUD, emotions and group mentality can drastically change what decisions we take.
As a social species, we can be persuaded by arguments that are not entirely true or by someone who looks like is speaking with authority.
Even professionals can be misguided, as we saw in the 2008 Financial Crises or any other Big Market Crash, and as we'll see again in the future.
Conclusion
When making any investment (or any big decision), we must consider that we are irrational. This is what allows us to analyze our emotions and, in the end, make the best possible decision!
Have you have noticed yourself or somebody else being irrational? If so, leave your example in the comments!
Thanks for reading!
Remember to Upvote and Share, so that I can keep making many posts per week!
Take a look at my last posts, about Monopolies and Oligopolies:
- How Oligopolies rule our world:
- What really are Monopolies? Why are most of them considered 'bad'?
- Why some Monopolies are allowed and even encouraged!
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