Understanding Irrational Thinking
Most people like to consider themselves rational beings, making their various life choices for all the logically "right" reasons. However, the fact is that human behavior is filled with irrational biases that seem to be hard-wired into our minds/brains.
This article attempts to define "rationality", and highlights some of the more common forms of irrationality. Being aware of these factors in our psychology may at least make us less vulnerable to their innate pitfalls.
A Definition of Rationality
Rationality means acting in the most reasonable way, given the information currently at your disposal. However, this definition requires that you have some goal(s) that you are acting towards fulfilling; otherwise you can't rationalize your choices. So being rational starts with knowing what you want to achieve, just as planning a journey starts with knowing your intended destination. NB: our goals are anything that's important to us and are usually far more diverse than just wealth maximization.
The Power of Defaults - Natural Laziness
People are naturally lazy (not necessarily irrational per se), we want to conserve energy for things we really enjoy and resist expending too much on tedious decision making. As a result we all too often accept the default options in decision processes rather than making conscious choices about what's best for our own needs. This is most graphically illustrated in the wide difference in organ donation rates in countries where donors must opt-in as opposed to those where they must opt out. Eg: Do Defaults Save Lives?
Lesson: in daily life the default effect puts us at most risk when dealing with sales people whose patter assumes we will take the most expensive option for every step unless we consciously step in and say otherwise. The more complex the decision, eg financial matters, the more likely we are to fall back on defaults. Don't be rushed, sales people are well versed in parting you from your money. But you're likely coming at the process for the first time. Don't decide on the spot, get the facts, mull it over with a coffee, and decide what's right for you!
Relative Judgments or Anchoring
Our decisions are often influenced by irrelevant factors that we aren't aware of. In an experiment students were asked to write down the last 2 digits of their social security numbers and then bid on various items. Those who wrote down higher numbers bid significantly more than those with lower, see The Fallacy of Supply and Demand.
Lesson: when setting a price to buy or sell something justify to yourself how the price is reached. If time permits, conduct the pricing exercise independently at two different times.
Loss Aversion - Sometimes Risk is Right
Amos Tversky and Daniel Kahneman demonstrated that the pain resulting from a loss far outweighs the pleasure obtained from an identical gain, eg: Choices, Values, and Frames (1984). While caution is often helpful, the asymmetry felt between gains and losses can result in lost opportunity due to excessive fear. This isn't to say you should risk your life savings on the spin of a roulette wheel, but calculated risk is frequently necessary for progress (rather than stagnation).
Lesson: when faced with a potentially beneficial but risky opportunity don't immediately rule it out (or snatch it up). Set aside time to think about it, preferably over more than one session. Consider the best-case, worst-case and most likely outcomes of taking the opportunity, and not taking it. Listen also to your gut, which choice makes you feel most uneasy?
The Pain of Paying
The "pain of paying" is the term coined by Dan Ariely for the discomfort of parting with money. However, the method of payment influences the degree of "pain" felt. Especially relevant in these times is that paying by card is less painful than paying by hard cash as the pain is somehow abdicated to the future (rationally the reverse should be true given the enormous interest rates charged by card companies).
Lesson: unless you have some rationally pre-planned purchase in mind, leave the cards behind if you're just going to the mall to window shop. Better still, don't go the mall until you actually need something!
Rational and Irrational - Our Dual Nature
Humans have a dual nature. On the one hand we are highly sophisticated beings, able to contemplate our own nature and that of the universe we inhabit, and to appreciate art, philosophy etc. But on the other hand we are animals, driven by evolutionary urges of survival and pro-creation.
In neurological terms this duality is often expressed as the limbic vs the prefrontal cortex, where the limbic system is responsible for emotions and instinctive responses and the prefrontal cortex is responsible for reason and logic.
These 2 modes of operation have been termed System 1 and System 2 by Nobel Laureate Daniel Kahneman in his 2011 book Thinking, Fast and Slow.
Essentially System 1 is our animal, emotional side that operates automatically and near-instantaneously, but is prone to error. System 2 is our evolved logical-rational side that tends to make better decisions but takes time and energy to do so, that we'd often rather not expend. So, unless we consciously choose to override it, we're usually driven by our (usually good enough) System one mode.
The Irrationality of Rationality - Can Irrational Thinking Be Good?
That irrationality has survived millennia of evolution suggests that it may offer some benefit. That benefit could be in the form of creativity or innovation.
Often it's the craziest (ie most irrational) ideas that yield the greatest dividends. Steve Jobs, founder of hugely successful Apple, didn't set out to give people what they wanted. Instead he dreamed of what they would want if only it existed and then created it. As Jobs says: "Stay hungry. Stay foolish." Without (some) irrationality there would be no invention, no entrepreneurs, no progress.
In purely objective terms religion, morality and altruism could all be considered irrational. There is no objective proof of a divine being and/or greater spiritual reality, yet billions of people find meaning in such beliefs. Similarly, in rational terms, dishonesty boils down to an assessment of likely costs vs benefits. And yet most people choose to behave (broadly) morally. And many of us freely contribute to charities far removed from our particular experience.
Even successful, hard-headed, businessmen like Donald Trump acknowledge the role of instinct, eg Trump says: "One point is to listen to your gut, no matter how good something sounds on paper."
So allow space for your System 1 hunches alongside your painstakingly devised rational strategies, and go with whatever's stronger.
A list of our many innate, irrational, biases may be found on Wikipedia.
Learn more about irrationality in Dan Ariely's Predictably Irrational. In this newly revised and expanded edition of the groundbreaking New York Times bestseller, Ariely refutes the common assumption that we behave in fundamentally rational ways. From drinking coffee to losing weight, from buying a car to choosing a romantic partner, we consistently overpay, underestimate, and procrastinate. Yet these misguided behaviors are neither random nor senseless. They're systematic and predictable—making us predictably irrational.