Are Humans Rational?

Adam Smith’s profound idea of the ‘Invisible Hand’ introduced us to a theory that has been widely acknowledged since the late 18th century, known as the ‘Rational Choice Theory’. Smith along with numerous other traditional economists believed that all humans make rational choices under any circumstance, and based a majority of other theories on the same assumption as well. However, the uncertainties that are constantly prevailing in all markets have led to present-day behavioral economists such as Thaler and Shiller widely contesting the basic fundamentals on which a simple supply-demand graph is made. 

According to me, the fact that theories such as the efficient market hypothesis are being used across the world by brokers, investors and businessmen to make investment choices  is in itself an example that man is not rational. The 2008 financial market stands testimony to the belief that humans are not inherently rational because if Wall Street, the place expected to be the most hyperrational of all, can crash due to cognitive biases then how can we assume all  humans to be rational? 

The major loophole is that rationality fails to take into account emotion. Now to prove this theory to you I will present to you a simple situation. If you are bitten by a spider and you have a pretty small- say a 1 in 100,000 chance that it proves to be fatal. How much would you consider to pay for an antidote to the venom? With that figure in mind I ask you my second question, If you are invited by a company researching the spider which asks you to get bitten by the spider, with the same probability of dying as mentioned earlier, how much would you expect the company to pay you? If you compare the two values, a majority of you will find that the latter figure was much greater than the first. However, considering that the probability of dying in both cases is the same, standard economic models will state that both cases should have the same monetary value. Surprising isn’t it? 

Although the above hypothesis will make you realise that it is seemingly obvious that all humans cannot be assumed to be rational in their choices, it is somewhat paradoxical that we so blindly follow theories and study concepts that majorly constitute this fundamental assumption of rationality. Ergo, do we really deserve the title ‘homo economicus’?

For Further Reading: 

1. https://www.investopedia.com/terms/b/behavioraleconomics.asp
2. https://hbr.org/2009/07/the-end-of-rational-economics
3. https://obssr.od.nih.gov/humans-are-predictably-irrational-the-influence-of-nobel-laureate-richard-thaler-and-behavioral-economics/
4. https://www.theatlantic.com/business/archive/2013/01/the-irrational-consumer-why-economics-is-dead-wrong-about-how-we-make-choices/267255/
5. https://www.inc.com/dustin-mckissen/research-from-nobel-prize-winning-economists-shows-how-irrational-awesome-humans-really-are.html