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SUBHODEV DAS

SONGSOPTOK THE WRITERS BLOG | 12/10/2014 |







How often have you (or someone else) blamed your irrational behavior for life’s malaise?

We live in a society where rationality is highly valued. Many people will probably want to avoid being irrational, lest they lose the respect of others. They want to signal rationality. However, if one never admits one’s irrationality to oneself, he/she will have a hard time to get over it. If, on the other hand, the society makes it clear that it’s okay to be irrational, as long as one is trying to overcome it, then the person can become more rational.

Let’s examine a few different cases where irrationality has been helpful.

The recent ‘Ebola freakout’ to grip the U.S. is a testament of mass irrationality that is more than just anecdotal. The stresses accompanying this epidemic of fear – the anxiety, the stigmatization and the economic impacts – are more damaging than Ebola itself. Yet, a sizeable portion of the U.S. population chose to react with gut feelings rather than by reasoned analysis. This form of rapid thinking enabled humans to survive the long course of evolution, before scientific methods and quantitative risk assessment were available. At a macroscopic time scale, a moment of irrationality could become an enduring rationality.

Organisms, including humans, are often assumed to be hardwired by evolution to make optimal decisions vis-à-vis available knowledge. Behavioral sciences have formulated the theory of rational choice based on axiomatic principles such as transitivity (if A is preferred to B and B preferred to C, then A is preferred to C) and independence of irrelevant alternatives (IIA; if A is the preferred option when A, B and C are all available, then A will be preferred to B when C is not available).

However, a recent study published in Biology Letters2 has demonstrated that violations in transitivity or IIA can result in irrational behaviors that are optimal, i.e., can be favored by natural selection. According to the study, such violations can occur because a current option may disappear in the near future or a better option may reappear soon. For example, a certain degree of irrationality can guide the selection of investment strategies from savings schemes that may not be available in the future.

In the book The Upside of Irrationality1, behavioral economist Dan Ariely suggests that the upside of irrationality to society is that it keeps us together more than hyper-rationality would. He argues, for example, that we irrationally mispredict the true trauma of divorce: “[A] divorce is often less devastating to a married couple than either member might anticipate.” If we were more rational, more people would split up. Since happiness in humans quickly adapts to new situations (like divorce), the book describes experiments on how the interruptions of unpleasant or pleasant tasks disrupt the adaptation process. “You may think that taking a break during an irritating and boring experience will be good for you, but a break actually decreases your ability to adapt, making the experience seem worse when you return to it. When cleaning your house or doing your taxes, the trick is to stick with it until you’re done.” A penchant for irrationality may save you the day!

What about irrationality in a group?

“Irrational exuberance” was the catchphrase of the stock market boom of the 1990’s, made famous by the then Federal Reserve Board Chairman Alan Greenspan as a warning about the overvaluation of the stock market. The stock market did climb to record heights a couple of years after Mr. Greenspan delivered his famous speech. In the process, it created wealth bonanza for many, particularly those who cashed out at the peak.

The catchphrase has an implication beyond the financial marketplace. As a society, human beings tend to display collective behavior when it comes to matter of euphoria. We see it in the “hooliganism” of soccer fans as well as in the “stampede” of pilgrims. In the surging optimism, individual rationality gives away to unfounded belief (or overvaluation of assets) not anchored in reality (or fundamentals). Perhaps, irrational exuberance is the only psychological stimulus that helps to connect an individual with its fellow human beings. Consequently, it remains a cornerstone of human condition.
In 1841, the noted Scottish journalist Charles Mackay chronicled the history of popular follies in his book Extraordinary Popular Delusions and the Madness of Crowds. Mackay’s debunking is perhaps best described in the following quote: "Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

A recent study3 points to the biological underpinnings of irrational exuberance. The work, done by researchers at the California Institute of Technology and Virginia Tech, sheds light on what goes on in the brains of traders in periods of irrational exuberance. The study was conducted in an experimental setting with the participants engaged in trading activities while they underwent magnetic resonance imaging. The researchers found that as prices rose, so did the activity in an area of the brain called the nucleus accumbens, an evolutionarily ancient area associated with reward. The neural activity constituted a biomarker for irrational exuberance.

A second finding of the research is in a relatively newer area of the brain called the anterior insular cortex, which is "active during bodily discomfort and unpleasant emotional states, such as pain, anxiety and disgust," the researchers wrote in the paper. Study participants who were more successful traders turned out to have higher activity in that area and more frequently sold before market peaks. In other words, these individuals were irrationally exuberant, but for a limited period, before responding rationally to gut feelings or signals from the body. 

“I want to be irrationally exuberant again” bumper stickers were on display in Silicon Valley during the economic downturn of the new millennium. It turns out that the legendary investor Warren Buffett shares that view. "A simple rule dictates my buying," he wrote in a 2008 New York Times op-ed. "Be fearful when others are greedy, and be greedy when others are fearful." His irrational exuberance is based on his “market insight” that can now be explained by neuroscience.
It’s okay to be irrational… sometimes.

References

[SUBHODEV DAS]






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