What causes irrationality

Today I want to talk about what might cause some behaviours that seem irrational and I always believe individuals have their own measurement and reasons to take actions unless they are experiencing mental instability.

Firstly, I think that individuals’ risk preferences changing along with their wealth changing is one factor that causes behaviours that seem irrational. Based on the Arrow-Pratt measure of risk aversion tells that the tolerance for risk of an individual with positive (negative) absolute risk aversion will fall (increase) as his or her wealth increases (decreases). This means for individuals with negative risk aversion are very likely to increase the risk they are taking in order to seek for higher returns to boost their wealth when they are experiencing decreases in their wealth. So they are taking more and more risk, the expected returns could become negative when the risk is more likely to be unmatched with the potential returns, they are more and more likely to lose more and more over time. Under such circumstance, it is unfair to say that their behaviours are irrational though their behaviours are very different from others because this kind of individuals has unusual risk preferences.

Secondly, shortage of time for careful measurement is another important factor that could lead to behaviours that seem irrational. It is usually certain that once an individual has more time, he or she can think into more details and make relatively better decisions, as he or she can use more time for calculations, collecting information and other things to improve their knowledges and abilities to analyse their issues. Such “irrationality” are actually caused by limitations of resources.

Thirdly, loss aversion can be another source of making irrational decisions. Sometimes individuals may have time; however, their wealth or opportunities may be affected by time as they can be changing over time. When people are afraid of losing too much because they do not make quick decisions, under the pressure of loss aversion, they tend to limit their time voluntarily and force themselves to make very rush decisions, which are more likely to seem irrational.

Fourthly, education can be another important factor. I think well educated people are more likely to make better decisions than poorly educated people. This is because people have higher chances to access to more theories or methodologies which can improve their modelling skills to build better expectations. In addition, during their education, they may practice the theories and methodologies very often. However, people with rich experience are also very important to behave more “rational” decisions as their experiences can help them to build up their thinking process faster, as they can use their experiences to compare the problems they are facing with similar issues that they have experienced, such comparisons can help them find the possibly best method to build up their strategies.

To conclude, it is extremely difficult to identify which sort of behaviours is irrational unless they are caused by mental instability that every behaviour has its reason behind. In general, people usually believe people who make good decisions more often are more rational than those who make bad decisions more often; such identification does not make sense as such phenonomon may merely caused by their different risk preferences and constraints to time, knowledge (education), experience and other things.