Saturday, December 05, 2009

Irrational Behavior

Matt Yglesias has a post here referencing a few other folks on how well, or poorly, the things that consititute rational, sound economic behavior for the fairly well-off do not apply well to those in poverty. That is to say that careful savings and efforts to gradually improve one's station, which work well for people in a fairly stable background may well not work at all for those in deep poverty.

This illustrates what is, I think, a more general error in thinking. There are a number of times when we identify some large group of people in some situation engaged in behavior which is then regarded as irrational. But does it really make sense to assume that a very large number of people are all acting irrationally? It would instead make more sense to suppose that we have misidentified the situation that these people are in.

I touched on this in an earlier post on the fund manager John Meriwether. Rather than assume that everyone investing with this man is irrational, it makes more sense to assume that they are acting as if they are a) in a financially secure position themselves and b) the money is not the result of their hard work, but rather it is essentially found money, a gift or handout. If that is the situation (which I think there are abundant reasons to believe that it is) then their behavior is rational.

Generally speaking, the kinds of behavior that are rational in, for example, a stable environment, in a highly unstable environment. When conditions are highly unstable, then long term planning and savings may well be of lower marginal value than the kind of prudential behaviors that work well in more stable environments.

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